9.6 SUMMARY

1. Growth is measured as changes in real GDP per capita in order to eliminate the effects of changes in the price level and changes in population size. Levels of real GDP per capita vary greatly around the world: more than half of the world’s population lives in countries that are still poorer than Canada was in 1900. Over the course of the twentieth century, real GDP per capita in Canada increased more than eightfold.

2. Growth rates of real GDP per capita also vary widely. According to the Rule of 70, the number of years it takes for real GDP per capita to double is equal to 70 divided by the annual growth rate of real GDP per capita.

3. The key to long-run economic growth is rising labour productivity, or Average Productivity of Labour (AP_L) or just productivity, which is output per worker. Increases in productivity arise from increases in physical capital per worker and human capital per worker as well as technological progress. The per worker production function shows how real GDP per worker depends on these three factors. The aggregate production function is a relationship that shows how the aggregate real quantity of output is produced using the available factors of production (the inputs: labour, physical capital, and human capital) and technology [A and the function F(…)]. The positive marginal productivity of physical capital (positive MP_K) is the amount by which productivity is increased as the result of a small increase in physical capital used. Other things equal, there are diminishing returns to physical capital or diminishing marginal productivity of (physical) capital (dim MP_K): holding human capital per worker and technology fixed, each successive addition to physical capital per worker yields a smaller increase in productivity than the one before. Equivalently, more physical capital per worker results in a lower, but still positive, increase in productivity. Growth accounting, which estimates the contribution of each factor to a country’s economic growth, has shown that rising total factor productivity, the amount of output produced from a given amount of factor inputs, is key to long-run growth. It is usually interpreted as the effect of technological progress. In contrast to earlier times, natural resources are a less significant source of productivity growth in most countries today.

4. The large differences in countries’ growth rates are largely due to differences in their rates of accumulation of physical and human capital as well as differences in technological progress. Although inflows of foreign savings from abroad help, a prime factor is differences in domestic savings and investment spending rates, since most countries that have high investment spending in physical capital finance it by high domestic savings. Technological progress is largely a result of research and development, or R&D.

5. Governments can help or hinder growth. Government policies that directly foster growth are subsidies to infrastructure, particularly public health infrastructure, subsidies to education, subsidies to R&D, and maintenance of a well-functioning financial system that channels savings into investment spending, education, and R&D. Governments can enhance the environment for growth by protecting property rights (particularly intellectual property rights through patents), by being politically stable, and by providing good governance. Poor governance includes corruption and excessive government intervention.

6. The world economy contains examples of success and failure in the effort to achieve long-run economic growth. East Asian economies have done many things right and achieved very high growth rates. The low growth rates of Latin American and African economies over many years led economists to believe that the convergence hypothesis, the claim that differences in real GDP per capita across countries narrow over time, fits the data only when factors that affect growth, such as education, infrastructure, and favourable government policies and institutions, are held equal across countries. In recent years, there has been an uptick in growth among some Latin American and sub-Saharan African countries, largely due to a boom in commodity exports.

7. Economists generally believe that environmental degradation poses a greater challenge to sustainable long-run economic growth than does natural resource scarcity. Addressing environmental degradation requires effective governmental intervention, but the problem of natural resource scarcity is often well handled by the market price response.

8. The emission of greenhouse gases is clearly linked to growth, and limiting them will require some reduction in growth. However, the best available estimates suggest that a large reduction in emissions would require only a modest reduction in the growth rate.

9. There is broad consensus that government action to address climate change and greenhouse gases should be in the form of market-based incentives, like a carbon tax or a cap and trade system. It will also require rich and poor countries to come to some agreement on how the cost of emissions reductions will be shared.