Chapter 9
Global Economic Growth and Development
◼ Overview
In this chapter, economic growth, its meaning, measurement, implications, and desirability are discussed.
The major determinants of economic growth are examined. These are productivity increases, the rate of
saving, technological change, research and development, an open economy, innovation, investment in
◼ Learning Objectives
After studying this chapter, students should be able to:
• 9.1 Define economic growth and recognize the importance of economic growth rates
• 9.2 Explain why productivity growth and saving are crucial for maintaining economic growth
• 9.3 Describe how immigration and property rights influence economic growth
• 9.4 Discuss the fundamental elements that contribute to a nation’s economic development
• 9.5 Evaluate whether the U.S. economy has entered a period of stagnant economic growth
◼ Outline
I. How Do We Define Economic Growth? Increases in per capita real GDP over time define
economic growth. It is measured by the rate of change of real GDP per capita per year. If there is
economic growth, the production possibilities curve will shift outward. (See Figures 9-1 and 9-2
and Table 9-1.)
A. Problems in Definition: Real standards of living can go up without any positive economic
growth when individuals are, on average, enjoying more leisure by working fewer hours, but
producing as much as before. Growth tells us nothing about the distribution of output and income.
C. The Importance of Growth Rates: Small differences in the growth rate are important. In
50 years, $1 trillion per year becomes $4.38 trillion per year if compounded at 3 percent per
130 Miller • Economics Today, Nineteenth Edition
II. Productivity Growth and Saving: Fundamental Determinants of Economic Growth:
Productivity growth and the national saving rate influence the rate of economic growth.
A. Productivity Increases: The Heart of Economic Growth: Labor productivity is real GDP
divided by the number of workers (output per worker). Increases in labor productivity lead to
C. New Growth Theory and the Determinants of Growth: New Growth Theory examines
factors that determine why technology, research, innovation, and the like are undertaken and
how they interact.
1. Technology: A Separate Factor of Production: One of the major foundations of new
D. Innovation, Knowledge, and Human Capital: Innovation involves transforming an invention
into something that benefits the economy. Much innovation involves small improvements in the
III. Immigration, Property Rights, and Growth: New theories of growth shed light on the impact of
immigration and property rights on the rate of growth of real GDP per capita.
A. Population and Immigration as They Affect Economic Growth: Population increases the
IV. Economic Development: The essential issue of development economics is why some countries
grow and develop and others do not, and the policies that might help developing countries get richer.
A. Putting World Poverty into Perspective: At least one-third of the world’s population lives at
B. The Relationship between Population Growth and Economic Development: World population
is expected to reach approximately 9 billion by the year 2050, up from 7 billion today. Excessive
population growth has been a concern ever since Malthus’s day (1798). (See Figure 9-8.)
1. Malthus Was Proved Wrong: As population has grown, the amount of food produced as
Chapter 9 Global Economic Growth and Development 131
C. The Stages of Development: Agriculture to Industry to Services: Modern rich nations
D. Keys to Economic Development
1. Establishing a System of Property Rights: The more certain property rights are, the more
they increase investments in education.
do economies that are closed to international trade.
V. Are Developed Nations Stuck with Stagnant Growth Prospects? Secular stagnation is a lengthy
period of negligible or no economic growth.
A. A Modern Version of the Secular Stagnation Phenomenon? Today’s secular stagnation
1. Economic “Sclerosis” in Europe and Elsewhere: The term “Eurosclerosis” is a
2. The Cumulative Effect of Low Growth Rates: Because growth compounds, a decrease
B. Possible Causes of Secular Stagnation
1. A Failure of New Technologies to Yield Significant Productivity Growth:
Technologies today simply have not significantly boosted the rate of output per worker.
2. Relatively Low Rates of Growth of Capital and Labor Resources: The additional
◼ Points to Emphasize
Measuring Economic Well-Being
Economic growth is typically measured by the rate of change of real per capita GDP. Although this
definition has the merit of being measurable, many economists maintain that growth rates do not really
132 Miller • Economics Today, Nineteenth Edition
The Importance of Growth Rates
The text emphasizes the difference that small economic growth rates can make over a number of years.
How to Show Economic Growth
The Importance of Property Rights in Economic Development and Growth
Economic growth will be increased if there are well-defined and enforced property rights. Economic
growth represents the sum of the expansion of the output of each firm in the economy. It is worth looking
at intellectual property rights—specifically copyright law—to examine the importance of property rights.
The Importance of Productivity Improvements
It is essential that students understand that increases in productivity over time are what cause economic
◼ For Those Who Wish to Stress Theory
The Mathematics of Compound Growth
The Rule of 70 is an approximate way of computing the doubling time of a sum growing at any given
compound growth rate. A more precise method is to use a compound growth formula so that the amount of
growth can be computed for any period. The formula for an amount compounded annually is as follows:
Qn = Q(1 + r)n
Chapter 9 Global Economic Growth and Development 133
The Neoclassical Growth Model
The neoclassical growth model was initially developed by Robert M. Solow in 1956 (see Selected
References). The model shows the effects of capital accumulation and technological change and
illustrates some of the ideas presented in the chapter. The model assumes two inputs, capital (K), and
labor (L), with output (Y) being a function of these two inputs. Solow separated the effects of capital
Competing Economists’ Views on Growth
The issue of whether growth should be encouraged or discouraged has been one of controversy for several
decades. It is based on different value judgments concerning whether existing institutional arrangements
are best or whether they should be changed to promote or slow down economic growth. Two groups of
134 Miller • Economics Today, Nineteenth Edition
Determinants of Economic Growth
The book makes it clear that no single factor is sufficient to generate economic growth. It is clear, however,
that when technological change is embodied in both human and nonhuman capital, a major prerequisite
◼ Further Questions for Class Discussion
1. Why can growth only occur if current consumption is sacrificed? A good way of approaching this
2. What kinds of government policies could promote economic growth? Government funding of
3. Ask students why less-developed countries are less likely to allow Schumpeter’s “creative
destruction” to occur as compared to the developed economies. An obvious point is that such
4. In recent years, the federal and state governments have reduced the percentage of higher education
costs that they will pay, thus increasing the percentage of costs borne by students and their families.
What is the likely effect on the future rate of growth in the United States? As the percentage of costs
5. Suppose that a country finds that its rate of economic growth has fallen from 3 percent to 2 percent
◼ Answers to Questions for Critical Analysis
Growth Rates around the World (p. 191)
“The largest change is from zero to one.” Does this statement have anything to do with relative
growth rates in poorer versus richer countries?
Interpersonal Trust and Economic Growth (p. 197)
Why do you suppose that nations with higher degrees of measured distrust of strangers tend to
observe lower rates of economic growth, other things being equal?
An Annual Quota on Importing Human Capital Fills Up in a Hurry (p. 198)
Who benefits from the exclusion of skilled foreign workers?
136 Miller • Economics Today, Nineteenth Edition
A Youth Shrinkage and Aging Capital Contribute to Secular Stagnation in
Japan (p. 205)
Why do you suppose that the Japanese government is contemplating a policy of encouraging retired
elderly people to move to the countryside? (Hint: Where are most capital resources located?)
◼ You Are There
Does More Income Inequality Necessarily Harm Economic Growth? (pp. 206–207)
1. Why does it appear to be difficult to assess whether there is a direct or inverse relationship
between inequality and economic growth?
2. Could higher economic growth cause greater income inequality in the near term but generate
a movement toward greater income equality in the long run? Explain your reasoning.
◼ Issues and Applications
Both Quality and Quantity of Regulations Matter for Economic Growth
(pp. 207–208)
1. Why might a stringent rule that induces a few firms to reduce production be less likely to
reduce economic growth rate than a less stringent but broader regulation that causes all
industries to cut their production?
2. Could one substantial regulation that affects all firms potentially cause a larger decrease in
productivity growth than dozens of minor rules? Explain.
Chapter 9 Global Economic Growth and Development 137
◼ Research Project
◼ Answers to Problems
9-1. The graph to the right shows a production possibilities curve for 2020 and two potential
production possibilities curves for 2021, denoted 2021A and 2021B.
a. Which of the labeled points corresponds to maximum feasible 2020 production that is
more likely to be associated with the curve denoted 2021A?
b. Which of the labeled points corresponds to maximum feasible 2020 production that is
more likely to be associated with the curve denoted 2021B?
9-2. A nation’s capital goods wear out over time, so a portion of its capital goods become unusable
every year. Last year, its residents decided to produce no capital goods. It has experienced no
growth in its population or in the amounts of other productive resources during the past year.
In addition, the nation’s technology and resource productivity have remained unchanged
during the past year. Will the nation’s economic growth rate for the current year be negative,
zero, or positive?
9-3. In the situation described in Problem 9-2, suppose that vocational training during the past
year enables the people of this nation to repair all capital goods so that they continue to
function as well as new. All other factors are unchanged, however. In light of this single
change to the conditions faced in this nation, will the nation’s economic growth rate for the
current year be negative, zero, or positive?
9-4. Consider the following data. What is the per capita real GDP in each of these countries?
Population
Real GDP
Country
(millions)
($ billions)
A
10
55
B
20
60
C
5
70
9-5. Suppose that during the next 10 years, real GDP triples and population doubles in each of the
nations in Problem 9-4. What will per capita real GDP be in each country after 10 years have
passed?
9-6. Consider the following table displaying annual growth rates for nations X, Y, and Z, each of
which entered 2017 with real per capita GDP equal to $20,000.
Annual Growth Rate (%)
Country
2017
2018
2020
X
7
1
4
Y
4
5
9
Z
5
5
2
a. Which nation most likely experienced a sizable earthquake in late 2017 that destroyed a
significant portion of its stock of capital goods, but was followed by speedy investments
in rebuilding the nation’s capital stock? What is this nation’s per capita real GDP at the
end of 2020, rounded to the nearest dollar?
b. Which nation most likely adopted policies in 2017 that encouraged a gradual shift in
production from capital goods to consumption goods? What is this nation’s per capita
real GDP at the end of 2020, rounded to the nearest dollar?
c. Which nation most likely adopted policies in 2017 that encouraged a quick shift in
production from consumption goods to capital goods? What is this nation’s per capita
real GDP at the end of 2020, rounded to the nearest dollar?
9-7. Per capita real GDP grows at a rate of 3 percent in country F and at a rate of 6 percent in
country G. Both begin with equal levels of per capita real GDP. Use Table 9-3 on page 203
to determine how much higher per capita real GDP will be in country G after 20 years. How
much higher will real GDP be in country G after 40 years?
9-8. Since the early 1990s, the average rate of growth of per capita real GDP in Mozambique
has been 3 percent per year, as compared with a growth rate of 8 percent in China. Refer to
Table 9-3. If a typical resident of each of these nations begins this year with a per capita real
GDP of $3,000 per year, about how many more dollars’ worth of real GDP per capita would
the person in China be earning 10 years from now than the individual in Mozambique?
9-9. On the basis of the information in Problem 9-10 and reference to Table 9-3, about how many
more dollars’ worth of real GDP per capita would the person in China be earning 50 years
from now than the individual in Mozambique?
9-10. In 2018, a nation’s population was 10 million. Its nominal GDP was $40 billion, and its price
index was 100. In 2019, its population had increased to 12 million, its nominal GDP had risen
to $57.6 billion, and its price index had increased to 120. What was this nation’s economic
growth rate during the year?
9-11. Between the start of 2018 and the start of 2019, a country’s economic growth rate was 4
percent. Its population did not change during the year, nor did its price level. What was the
rate of increase of the country’s nominal GDP during this one-year interval?
9-12. In 2018, a nation’s population was 10 million, its real GDP was $1.21 billion, and its GDP
deflator had a value of 121. By 2019, its population had increased to 12 million, its real GDP
had risen to $1.5 billion, and its GDP deflator had a value of 125. What was the percentage
change in per capita real GDP between 2016 and 2017?
9-13. A nation’s per capita real GDP was $2,000 in 2017, and the nation’s population was 5 million
in that year. Between 2017 and 2018, the inflation rate in this country was 5 percent, and the
nation’s annual rate of economic growth was 10 percent. Its population remained unchanged.
What was per capita real GDP in 2018? What was the level of real GDP in 2018?
9-14. Brazil has a population of about 200 million, with about 145 million over the age of 15. Of
these, an estimated 25 percent, or 35 million people, are functionally illiterate. The typical
literate individual reads only about two nonacademic books per year, which is less than half
the number read by the typical literate U.S. or European resident. Answer the following
questions solely from the perspective of new growth theory:
a. Discuss the implications of Brazil’s literacy and reading rates for its growth prospects in
light of the key tenets of new growth theory.
b. What types of policies might Brazil implement to improve its growth prospects? Explain.
9-15. Based on data in Table 9-1 and the rule of 70, if U.S. per capita real GDP continues to grow at
the average rate it has experienced since 1990, about how many years will be required for it to
double?
9-16. Based on data in Table 9-1 and the rule of 70, if India’s per capita real GDP continues to
grow at the average rate it has experienced since 1990, about how many years will be required
for it to double?
9-17. Based on data in Table 9-1 and in Table 9-3, if china’s per capita real GDP continues to grow
at the average rate it has experienced since 1990, will its per capita real GDP be twice as high
as it is today within a decade? Explain your reasoning.
9-18. Consider Figure 9-7, and suppose that we round the rate of growth of per capita real GDP
experienced in the European Union between 1981 and 1990 to the nearest full percentage
point. Based on the information in Table 9-3, by what percentage would per capita real GDP
have increased between 1990 and 2020 if the economic growth rate will have remained at this
rounded level?
9-19. Consider Figure 9-7, and suppose that we round the rate of growth of per capita real GDP
experienced in the European Union between 2001 and 2017 to the nearest full percentage
point. Based on the information in Table 9-3, by what percentage will per capita real GDP
increased over the next 30 years if the economic growth rate remains at this rounded
level?
9-20. Consider Figure 9-8, According to the rule of 70, about how many years would have been
required for U.S. per capita real GDP to double if it had remained at the average level
observed between 1961 and 1980? Between 2001 and 2017?
◼ Selected References
Adelman, Morris A. et al., No Time to Confuse, San Francisco Institute for Contemporary Studies, 1975.