We live in a world today that would be unrecognizable and unimaginable to those born two centuries ago. Things we take for granted—jet travel, antibiotics, electricity, the Internet, dentistry—are all products of the extraordinary growth of the last 200 years. Yet despite all our technological advances, billions of people in the world still live in poverty. Although some countries continue to grow rapidly, others stagnate or even go backward. If we could unlock the secrets of economic growth, we would have the means to help people to permanently better lives.
Even as economists emphasize economic growth as a way to combat poverty, noneconomists are often critical of economic growth, pointing out that it comes with costs as well as benefits. For example, as countries become richer, they use more energy and more of the world’s natural resources. Oil reserves are being depleted, and rainforests are disappearing. Growth may lead to increased pollution, such as greenhouse gas emissions that in turn contribute to climate change. These are serious and legitimate concerns. In brief, economists have four main responses.
Decades of research by economists have told us that there is no magic bullet, no simple and painless way to encourage economic growth. At the same time, we have learned a great deal about how and why countries grow. We have learned that growth depends on the accumulation of both physical and human capital. We have learned that growth ultimately hinges on the growth of knowledge, highlighting the importance of education, training, and research and development (R&D). And we have learned that good institutions are critical for countries that want to promote economic growth.
We have made progress, but the study of economic growth remains one of the most fascinating and challenging problems in all economics. There is no doubt that economists will continue their search for the elusive secrets of prosperity. As the Nobel Prize–winning economist Robert Lucas observed, “Once one starts to think about [economic growth], it is hard to think about anything else.”
World Bank: http://www.worldbank.org
(Advanced) In the late 1990s, the US government was running a surplus of about 1 percent of gross domestic product (GDP). Current projections show that the government is going to run deficits in excess of 5 percent of GDP in the future. Let us imagine that there are no changes in private saving or in foreign borrowing/lending.The condition that private savings do not change is important. For example, if the government cuts taxes, it is possible that people will predict that taxes will be higher in the future and will increase their savings in anticipation. We will say more about this in Chapter 14 "Balancing the Budget". In this case, the increased deficit translates directly into a decrease in the investment rate. To investigate the implications of such a decrease, suppose that, in the year 2000
investment rate = 0.24, depreciation rate = 0.085, and output growth rate = 0.035.On a balanced-growth path, the ratio of capital stock to output is given by the following formula:
Suppose that the economy was on a balanced-growth path in 2000. Calculate the balanced-growth ratio of the capital stock to GDP.
On a balanced-growth path, the ratio of capital stock to output is given by the following formula:
Use the formula for the balanced-growth rate of output to determine how the ratio of capital stock to output depends on the growth rate of the workforce. Does an increase in the growth rate of the workforce lead to an increase or a decrease in the ratio of capital stock to output?
Economics Detective
Spreadsheet Exercises
Suppose that an economy has the following production function:
Suppose that the workforce is growing at 1 percent per year, and human capital is growing at 2 percent per year. (We are assuming technology is constant in this example.) Suppose that we find that the ratio of capital stock to GDP is 4 on all dates and, initially, human capital is 15,000. What are the values for the growth rate of output per worker, the growth rate of output, and the growth rate of capital?