Economic Growth Rates

watch 4 short videos that relate to Chaper 8. Choose one video (Choose from video 2-4, You may NOT use video 1 as the basis for your paper!!!!) to critically react to. Think about how the video relates to Chapter 8 and how it demonstrates the ECONOMIC concepts that are critical to growth. Write a 1 page, single-spaced, paper following the instructions for writing a Critical Reaction Paper. Upload your paper as a Word Document or Rich Text File, using the link below the video.(The note about chapter 8 have submitted in additional materials, you should relates the chapter 8 and the video together to write this article. )
Here is the 4 videos link: 1. 2. 3. 4.

Chapter 8 Lecture Notes

8.1 Economic Growth Rates
A. Review
GDP measures the total value of final goods and services produced in a country. But it does not adjust for size of a country.
Real GDP per capita is the gross domestic product per person adjusted for changes in constant prices. It is the usual measure of living standards across time and between countries.
B. Measuring Economic Growth (See Figure 8.1 and illustrate how growth in productive capacity is like increasing the production possibilities of an economy. You may want to review the production possibilities curve from Chapter 2.)
Growth rates measure percentage rate of change of a variable from one period to another using the following formula:

The rule of 70 is a rule of thumb that says output will double in 70/x years, where x is the percentage rate of growth.
C. Comparing the Growth Rates of Various Countries
Comparing GDP across countries is difficult.
a. Different currencies
b. Different consumption patterns
Some economists have accounted for variations in the cost of living in different countries by:
a. Collecting vast amounts of data on prices of comparable goods
i. Same good
ii. Same quality
b. Using the prices of all these goods to adjust all prices in other countries to equivalent U.S. prices
After accounting for different currencies, U.S. has second highest GDP per capita, $39,170 in 2004. Luxembourg was first with a per capita GDP of $61,220.
D. Are the Poor Catching Up?
Table 8.1 presents real GNP per capita for 11 countries in 2004.
The very poor countries have extremely low figures: Pakistan GDP per capita = $2160, less than 6% of U.S. GDP per capita.
Growth rates vary quite dramatically across countries:
a. Japan = 4.10 percent
b. U.S. = 2.19 percent
c. Zambia = -0.83 percent
Convergence is the process by which poorer countries close the gap with richer countries in terms of real GDP per capita. Is there convergence, i.e., do poorer countries close the gap by growing faster?
a. Yes, see Figure 8.2, which plots average growth rates versus GDP in 1870 for 16 developed countries. Evidence in favor of convergence is clear in developed economies.
b. For less-developed countries, the picture is less clear.
c. All in all, economists find only weak evidence in favor of convergence.

8.2 Capital Deepening
One of the most important mechanisms for economic growth is an increase in capital per worker.
A. Recall from last chapter, and Figure 8.3 of this chapter, that an increase in capital increases output even if labor does not change.
Additional capital shifts the production function up, increasing output.
Additional capital shifts labor demand out, increasing real wages.
An economy produces more per worker with more capital.
B. Saving and Investment
The simple model of capital deepening looks at the relationship between saving(income that is not consumed) and investment.
Simple example of capital deepening
a. Consider an economy with constant population, full employment, no government, and no foreign sector.
b. Output is purchased for consumption or investment, and income is either consumed or saved.
i. C + I = C + S
ii. S = I
c. The stock of capital depends on two factors: gross investment and depreciation.
Kt+1 = Kt + It 2 Depreciated Capital = Kt + Net investment
d. Higher savings, i.e., higher investment, increases the capital stock, i.e., creates capital deepening.
India has the world’s second largest population. But due to diminishing returns, output per capita in India is very low.
Government spending and taxation: suppose the government increases taxes to spend more on non-investment goods and services.
a. Higher taxes lower income lower private savings lower investment less capital deepening
b. If the government spent the revenue on investment goods and services more capital deepening
Foreign sector: A trade deficit made up of capital goods increases capital deepening.
D. Limits to Capital Deepening
Capital deepening has limits because of the principle of diminishing returns.
a. With a fixed labor force, an increase in capital increases output at a decreasing rate.
b. Since savings is related to output, savings increases at a decreasing rate.
c. However, if capital depreciates, an increase in the capital stock increases depreciation. See the appendix to this chapter for discussion of Solow growth model and the relationship between gross investment and depreciation.
d. There is a natural point where gross investment is equal to depreciation. K cannot increase above this point; higher savings rates increase investment, but higher capital increases depreciation more.

8.3 The Key Role of Technological Progress
A. Technological progress is when an economy operates more efficiently by producing more output without using more inputs.
Invention of the light bulb, thermometer, disposable diapers, etc.
New ideas making us more effective

B. How do we measure technological progress?
Recall the production function: Y = F(K, L)
Robert Solow, a Nobel laureate from M.I.T., added a measure of technological progress, A: Y = F(K, L, A)
Growth accounting is a method to determine the contribution to economic growth from increased capital, labor, and technological progress.
a. We observe Y, K, and L over time in most economies.
b. How much of the change in Y is due to changes in K and changes in L? Whatever growth is left over must be due to A. This is called growth accounting (see Table 8.2 for examples of estimates of the sources of GDP growth in the United States).
Solow’s formula for calculating technological progress is:
Output growth ─ { [(labor share) x (labor growth)] + [(capital share) x (capital growth)] }
Labor share is the share of output paid to labor and capital share is the share of output paid to capital owners.
C. Using Growth Accounting
Growth accounting can be used to understand different aspects of economic growth.
Look at the following applications for examples.
Labor productivity is the output produced per hour of work.

8.4 What Causes Technological Progress?
A. Research and development in fundamental science. See Figure 8.5 for spending on research and development in 7 major countries in 1999.
B. Monopolies that spur innovation: Creative destruction is the view that a firm will try to come up with new products and more efficient ways to produce products to earn monopoly profits.
Without the ability to reap the rewards of innovation, a company will not fund research and development.
The government grants patents to allow for temporary monopolies for 20 years.
C. The scale of the market: If markets are too small, there are not enough incentives to engage in technological progress.
D. Induced innovations: Many innovations are the result of a need to cut cost.
E. Education and the accumulation of knowledge: Increasing the investment in human capital increases the productivity of the labor force.
F. New growth theory: modern theories of growth that try to explain the origins of technological progress.

8.5 A Key Governmental Role: Providing the Correct Incentives and Property Rights
A. Governments play a critical role in a market economy by ensuring that contracts are upheld and that property rights are enforced.
B. This allows business and individuals to enter into economic transactions.
C. Without this, people are reluctant to trade and the incentive to innovate is muted.