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4 WHAT CAUSES TECHNOLOGICAL PROGRESS? (3 of 3)

4 WHAT CAUSES TECHNOLOGICAL PROGRESS? (3 of 3)

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APPLICATION 5

THE ROLE OF POLITICAL FACTORS IN ECONOMIC GROWTH
APPLYING THE CONCEPTS #5: How do varying political institutions affect economic growth?

Growth can, and has, occurred in both authoritarian and participatory governments.

Transformative economic growth like the Industrial Revolution usually requires participatory institutions.





Sustained technological progress is disruptive and authoritarian regimes have difficulty dealing with the change.
The old monarchies of Europe fell and were replaced with democracies or limited monarchies.
Can China maintain strong economic growth without political transformation?

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APPLICATION 6

CULTURE, EVOLUTION AND ECONOMIC GROWTH
APPLYING THE CONCEPTS #6: Did culture or evolution spark the Industrial Revolution?

In studying the economic history of England before the Industrial Revolution, Professor Clark discovered an interesting fact.



He found that children of the more affluent members of English society were
more likely to survive than those of the less affluent.



With the slow growth of population over several centuries, this differential survival of the wealthy had the effect of creating downward mobility for the rich, as their
sons and daughters increasingly populated the society.

This change had profound effects on English society. The cultural habits of the rich filtered through the entire society.




Social virtues such as thrift, prudence, and hard work became more commonplace, while impulsive and violent behaviors were reduced.
Eventually, these changes in culture became sufficiently pronounced that a qualitative change took place in society.

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8.5 A KEY GOVERNMENTAL ROLE: PROVIDING THE CORRECT INCENTIVES AND
PROPERTY RIGHTS
What is the connection between property rights and economic growth?



Without clear property rights, there are no proper incentives to invest in the future—the essence of economic growth.

What else can go wrong?

• Governments in developing countries often:
• Adopt policies that effectively tax exports
• Pursue policies that lead to rampant inflation
• Enforce laws that inhibit the growth of the banking and financial sectors
Results:





Fewer exports
Uncertain financial environment
Reduced saving and investment

With the right incentives, individuals and firms in developing countries will take actions that promote economic growth.

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APPLICATION 7

LACK OF PROPERTY RIGHTS HINDERS GROWTH IN PERU
APPLYING THE CONCEPTS #7: Why are clear property rights important for economic growth in developing countries?

Throughout the developing world, property is often not held with clear title. Without clear title, property cannot be used as collateral for loans.

Result: The poor living on very valuable land may be unable to borrow against that land to start a new business.
Producing palm oil in Peru is very profitable, but it depends upon the ability to borrow funds.
Production of coca paste—an ingredient to cocaine—does not take as much time and does not depend on finance.
Switching farmers away from production of coca paste to palm oil also requires improvements in finance, which are very difficult without clear property
rights.

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KEY TERMS

Capital deepening
Convergence
Creative destruction
Growth accounting
Growth rate
Human capital
Labor productivity
New growth theory
Real GDP per capita
Rule of 70
Saving
Technological progress

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APPENDIX A A MODEL OF CAPITAL DEEPENING (1 of 4)
PRINCIPLE OF DIMINISHING RETURNS
Suppose output is produced with two or more inputs, and we increase
one input while holding the other input or inputs fixed. Beyond some
point—called the point of diminishing returns—output will increase at a
decreasing rate.

Holding labor constant, increases in the stock of capital increase output,
but at a decreasing rate.

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▼FIGURE 8A.2
Saving and Depreciation as Functions of the Stock of Capital

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APPENDIX A A MODEL OF CAPITAL DEEPENING (2 of 4)
Change in the stock of capital = salving - depreciation =
sY - dK

Starting at K0, saving exceeds depreciation. The stock of capital
increases.

This process continues until the stock of capital reaches its
long-run equilibrium at K*.

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APPENDIX A A MODEL OF CAPITAL DEEPENING (3 of 4)
A higher saving rate will lead to a higher stock
of capital in the long run. Starting from an initial
capital stock of K1, the increase in the saving
rate leads the economy to K2.

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APPENDIX A A MODEL OF CAPITAL DEEPENING (4 of 4)
Technological progress shifts up the saving function and
promotes capital deepening.

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