CH 7

Chapter 7
ECONOMIC GROWTH
IN THE GLOBAL
ECONOMY
Ifeanyi Uzoka, Sheridan College

Copyright © 2020 Nelson Education Ltd.
7.1 Economic Growth
7.2 Determinants of Economic Growth
7.3 Public Policy and Economic Growth
7.4 Population and Economic Growth
Copyright © 2020 Nelson Education Ltd 3

 This section will answer the following key questions:
◦ How does economic growth differ from the business cycle?
◦ What is economic growth?
◦ What is the Rule of 70?

 How does economic growth differ from the business
cycle?
◦ Business Cycles are short-run variations in economic activity.
◦ Economic Growth is an upward trend in the real per capita
output of goods and services.
 It is usually measured by the annual percent change in real
GDP per capita.

Exhibit 1: Short-Run vs. Long-Run Economic Growth
◦ Short-run fluctuations in
economic activity occur
around the long-run trend
rate of growth.
◦ It is this long-run trend
rate that shows economic
growth.

 How does economic growth differ from the business
cycle? [cont’d]
◦ Economic growth depends on
 the quantity and quality of an economy’s resources;
 technology, which increases an economy’s production
capabilities.
◦ Economic growth can be shown as an outward shift of the
production possibilities curve.

 What is the Rule of 70?
◦ The Rule of 70 shows how long it will take a nation to
double its output at various growth rates.
◦ Even a small change in the growth rate will have a large
impact over a lengthy period.

Exhibit 3: Canadian RGDP per Capita, 1968-2017

Exhibit 4: Annual
Growth Rates in
RGDP per Capita,
Selected Countries

 What is the Rule of 70? [cont’d]
◦ Due to differences in growth rates, some countries will
become richer than others over time.
◦ With relatively slower economic growth, today’s richest
countries will not be the richest for very long.

 Section Check
◦ Economic growth refers to the long-run trend rate of
growth for an economy.
◦ Business cycle refers to the short-run fluctuation in

economic activity around this trend rate of growth.

 Section Check [cont’d]
◦ Economic growth is usually measured by the annual
percentage change in real output of goods and services
per capita.
◦ Improvements in and greater stocks of land, labour,

capital, and entrepreneurial activity will lead to greater
economic growth and shift the production possibilities
curve outward.

◦ According to the Rule of 70, if you take a nation’s growth
rate and divide it into 70, you have the approximate time
it will take to double the national income level.

 This section will answer the following key question:
◦ What factors contribute to economic growth?

 What factors contribute to economic growth?
◦ Productivity growth is key to changes in the living
standard.
◦ Productivity is the amount of goods and services a
worker can produce in an hour.
◦ It determines a country’s standard of living.
◦ Consumption can only increase in the long run if
production is increased.

 What factors contribute to economic growth? [cont’d]
◦ Productivity growth depends on four major factors:
 Physical capital inputs (machines, tools, buildings,
inventories)
 Quantity and quality of labour of resources
 Increased use of natural resources
 Technological knowledge allowing greater output than
previously possible
◦ Physical capital includes goods (tools and factories) that
have already been produced and are now producing other
goods and services.
◦ Physical capital increases labour productivity.
◦ Capital formation plays a significant role in economic
development.

◦ Society must sacrifice present consumption to invest in new
capital.
◦ Capital is subject to diminishing marginal returns (DMR):
 Adding more capital still adds to output, but by smaller and
smaller additional amounts.

Exhibit 1: Per-Worker Production Function
o An extra unit of capital
per worker leads to
more output per worker
when the economy has
a lower level of capital
per worker.

◦ Capital’s Diminishing Marginal Returns (DMR):
 In the long-run, ceteris paribus, the benefit of a higher
saving rate and additional capital stock becomes smaller
and the rate of growth slower.
 Capital’s DMR may help explain the variation in growth rates
between rich and poor countries.

◦ All forms of productive activity require labour.
◦ An increase in the quantity of labour does not necessarily
increase output per capita.
◦ Output per capita increases if the labour force participation
rate rises, workers work more, and/or skills increase.

◦ Human capital: productive knowledge and skill from
education and on-the-job training.
◦ An abundance of natural resources (fertile soil, etc.)
can enhance output.

◦ A large natural resource base can affect the initial
development process.
◦ Sustained growth is influenced by other factors.
◦ A limited resource base can pose an obstacle to growth.
◦ Technological advances drive productivity, enabling workers
to produce more.

◦ Technological advances originate from human ingenuity and
creativity.
◦ They enhance the amount of output from a given quantity

of resources.
◦ Innovation: the application of new knowledge to create

new products or improve existing ones.

◦ Countries that do not
keep up with technology
will generally be unable
to keep up their
economic growth and
standard of living.

Exhibit 3: Technological Change and the Per-Worker
Production Function
◦ Technological change can
shift the per-worker
production curve upward,
indicating that, per worker,
more output is produced with
the same amount of capital.

 Section Check
◦ The factors that contribute to economic growth are the
same factors that determine growth in productivity.
◦ They include physical capital, quantity and quality of

labour, increased use of natural resources, and technology.

◦ What policies can a nation pursue to increase economic
growth?
◦ Can rates of economic growth between different economies
converge?

 What policies can a nation pursue to increase
economic growth?
o The following major policies and institutional structures help
to promote economic growth:
1. Savings 4. Property rights

2. Research & development 5. Free trade
3. Infrastructure 6. Education
Copyright © 2016 by Nelson Education Ltd. 31

economic growth? [cont’d]
◦ Importance of savings to economic growth:
 Leads to higher rates of investment and capital
formation.
 Allows for greater consumption in the future.

 What policies can a nation pursue to increase economic
growth? cont’d
◦ Importance of Infrastructure:
 Infrastructure (roads, airports, information technology) is
critical to economic growth.
 Some are privately owned other are publicly owned.
 Improvements in infrastructure will lead to higher
productivity

◦ Importance of Research and Development:
◦ Research and Development (R&D) refers to activities

undertaken to create new products and processes that
will lead to technological progress.

◦ Research and development leads to new products,
management improvements, production innovations, or
simply learning-by-doing.
◦ Capital depreciates over time and is replaced with new
equipment that embodies the latest technology.

◦ Rewarding innovators with patents has paid big dividends
in the past 50 to 60 years.
◦ Science and medicine, information and communications,

and agriculture.

◦ Importance of property rights:
 Property rights give owners the legal right to keep or sell
their property.
 Growth rates tend to be higher in countries where the
government enforces property rights.

◦ Free trade can lead to greater output because of
comparative advantage.
◦ Comparative advantage suggests that if two nations each

specialize in producing a small number of goods and then
trade, both parties can benefit.

◦ Russians have high
levels of education,
but the failure of their
legal system has led to
a dismal economic
performance.

◦ Importance of education:
◦ Education is an investment that can improve productivity
and increase future earning power.
◦ It increases the skill level of the population and raises the
standard of living.

◦ Education can generate some indirect benefits, including:
 lower crime rates
 new ideas
 more informed voters

◦ Better education is a
relatively inexpensive
method to enrich the lives of
those in poorer countries.

 Can rates of economic growth between different
economies converge?
◦ It is possible for poor countries to grow faster than
countries with higher real GDP per capita.
◦ To achieve this, they have to invest in technology and

human capital, as did South Korea, Taiwan, and Singapore.

 Can rates of economic growth between different
economies converge? [cont’d]
◦ Factors impacting the ability of developing countries to
achieve greater economic growth:
 Ability to adopt existing technology from developed countries
 Diminishing marginal returns
 Higher population growth
 Low literacy and educational attainment

 Section Check
◦ Generally speaking, greater economic growth is fostered by
policies and institutional structures that promote higher
levels of saving, more research and development, better
protection of private property rights, freer trade, and more
education.

◦ While certain factors, such as the ability to adopt existing
technology, would seem to allow developing nations to grow
faster than developed nations, population growth and low
literacy rates tend to produce the opposite effect.
◦ Therefore, there seems to be no clear indication that rates of
economic growth between economies will converge.

◦ What is the effect of population growth on per capita
economic growth?
◦ What is the Malthusian prediction?

 What is the effect of population growth on
per capita economic growth?
◦ The world’s population was around 700 million in 1750.
◦ In 1900 (150 years later), it was 1.6 billion.
◦ In 1964 (64 years later), it doubled again to 3.2 billion.
◦ In 2005 (41 years later), it doubled again to 6.4 billion.
◦ in 2011, it was 7 billion
◦ is projected to reach 9 billion in 2050.

 What is the effect of population growth on
per capita economic growth? [cont’d]
◦ The effect of population growth on per capita economic
growth is unclear.
◦ If population expands faster than output, per capita output
falls.
◦ However, due to economies of scale, larger markets can
lead to more efficient-sized production units.

 What is the Malthusian prediction?
◦ English economist Thomas Malthus predicted that
 Per capita economic growth would eventually become

negative.
 Wages would ultimately reach equilibrium at a subsistence

level.

 What is the Malthusian prediction? [cont’d]
◦ Malthus based his predictions on three assumptions:
1. The economy was agricultural, with two inputs—land and
labour.
2. Supply of land was fixed.
3. Human sexual desire worked to increase population.

◦ Population growth would lead to an increase in the
number of workers and more output.
◦ With land fixed, diminishing returns will set in.
◦ Output will rise but by a diminishing amount.

◦ Malthus’s assumptions proved wrong for many nations.
◦ New techniques effectively increase arable land.
◦ They ignored the effect of technological advance.
◦ Population can be controlled through birth control
techniques.
◦ As countries become richer, family size tends to become
smaller.

◦ As countries become richer:
 Family size tends to become smaller and so does population
growth.
 Women achieve better access to education and jobs.
 Women’s opportunity cost of raising children rises and the
fertility rate falls.

◦ On the other hand, population growth can lead to greater
economic growth.
◦ Larger population may lead to more human capital
 contributing to even greater economic growth through
technological progress.

◦ In some developing countries, population growth is a
problem.
◦ Especially if the supply of land is fixed, capital growth is
slow, and technological advances are few.
◦ In these cases, population growth causes a negative effect
on per capita output.

 What is the Malthusian prediction? cont’d
◦ To achieve greater economic growth and higher standards of
living, some developing countries have implemented policies
to reduce population growth.
◦ China made it law to regulate the number of children a
family can have.

 Section Check
◦ Population growth may increase per capita output in
resource-rich countries such as Canada, the United States,
Australia, and Saudi Arabia because these countries have
more resources for production use by each labourer.

◦ Such countries are more able to take advantage of
economies of large-scale production and are also more
likely to have rapidly expanding technology.

◦ The Malthusian prediction was that, due to limited
productive resources and rapid population growth, per
capita economic growth would eventually become
negative.

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Chapter 7

Ifeanyi Uzoka, Sheridan College

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◦ Business cycle refers to the short-run fluctuation in

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◦ Improvements in and greater stocks of land, labour,

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◦ They enhance the amount of output from a given quantity

◦ Innovation: the application of new knowledge to create

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◦ They include physical capital, quantity and quality of

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1. Savings 4. Property rights

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◦ Research and Development (R&D) refers to activities

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◦ Science and medicine, information and communications,

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◦ Comparative advantage suggests that if two nations each

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◦ To achieve this, they have to invest in technology and

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◦ What is the Malthusian prediction?

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 Per capita economic growth would eventually become

 Wages would ultimately reach equilibrium at a subsistence

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◦ With land fixed, diminishing returns will set in.