Current Events:
Feb. 2 (Bloomberg) -- Rudy Penner, former director of the Congressional Budget Office, talks with Bloomberg's Deirdre Bolton about Obama's federal budget proposal for fiscal 2011. Obama administration seeks a $970 billion tax increase over the next decade on Americans earning more than $200,000 and wants to take in an additional $400 billion from businesses even as it retools a proposed crackdown on international tax-avoidance techniques. (Source: Bloomberg)
Chapter Overview
After discussing the classical model, the chapter presents material on the sources
of long-run economic growth (with particular emphasis on productivity growth)
and the importance of infrastructure. The chapter concludes with a section on innovation waves.
Chapter Outline
Internet and Economic Freedom Boost Entrepreneurs Worldwide, 3:05
For more than a century entrepreneurs have brought innovation and change to the world. Today, modern technology, looser government controls and better access to capital have made it even easier for entrepreneurs to succeed. VOA's economics correspondent Barry Wood looks at entrepreneurship worldwide, profiling business risk-takers in Africa, the Middle East, the Americas, Asia and Russia.
Checkpoint: Infrastructure and Economic Growth, p. 468
The Changing Face of Innovation Waves, p. 469
Ideas for Your Classroom Audience
The best illustration of the importance of the rate of economic growth is the rule
of 72 (or 70 in some texts). Use different growth rates and illustrate how long it
takes for the GDP in a country to double. Follow this up with Question 7 from the end of-chapter Questions and Problems (the question asks whether a 1.4% growth
rate is so different from a 3.4% growth rate).
The text mentions Somalia as a particular country that has suffered due to its
severe political problems. Take a virtual field trip to Somalia on this website
from BBC News. See the Web site at http://news.bbc.co.uk/1/hi/world/africa/
country_profiles/1072592.stm.
Chapter Checkpoints
The Classical Model, p. 470
Question: The classical model relies on competitive markets for labor, products,
and capital to keep the economy near full employment and output. The United
States has enjoyed nearly 3 decades of high employment, high growth, and low
inflation, interrupted by two short and mild recessions. Has the recent growth in
globalization and trade liberalization introduced more competition into labor, capital, and product markets, making our economy look and act like classical economists envisioned?
The point is to check that students can: relate their understanding of the classical model to changes in the global economy.
Sources of Long-Run Economic Growth, p. 470
Question: In 2006, Warren Buffett, the world's second richest individual, announced that over the next few years he would be giving 85% of his wealth, over $30 billion, to the Bill and Melinda Gates Foundation. The foundation focuses on grants to developing nations, helping the poorest of the poor. What suggestions would you give the Foundation to help these developing nations grow?
The point is to check that students can: relate the factors that affect long-run economic growth to the activities of a foundation like the Gates Foundation.
Infrastructure and Economic Growth, p. 470
Question: Imagine a country with a “failed government” that can no longer enforce
the law. Contracts are not upheld and lawlessness is the order of the day. How could an economy operate and grow in this environment?
The point is to check that students can: understand how important the legal framework is to economic growth.
Extended Examples in the Chapter
The Changing Face of Innovation Waves
Looking back to Schumpeter’s creative destruction, this section argues that the time between waves of innovation is becoming shorter. It cites the work of William
Baumol, who contends that capitalism’s ability to produce a steady stream of new
ideas and processes has made capitalism the most efficient growth machine and the
best economic system for generating growth.
The sources cited for this section are “Catch the Wave: The Long Cycles of
Industrial Innovation are Becoming Shorter,” from The Economist, February 19,
1999, and The Free-Market Innovation Machine: Analyzing the Growth Miracle of
Capitalism, by William J. Baumol (Princeton: Princeton University Press, 2002).
Examples Used in the End-of-Chapter Questions
Questions 4 and 7 reference growth rates in different countries. Question 11 references per capita income (or output). To learn more about growth rates and per
capita income in different countries, visit the CIA Factbook Web site at
https://www.cia.gov/library/publications/the-world-factbook/.
For Further Analysis
Immigration: Good or Bad for Productivity?
The example provided in the student handout can be used as a small group exercise
or as an individual exercise. It is also suitable to use as the basis for a classroom debate. The exercise expands on the chapter’s coverage of the sources of long-run economic growth by exploring the issue of immigration. Students are directed to read two articles about different “types” of workers and use them as a basis for analyzing the impact of immigration.
See the paper on guest-worker programs by Mark Krikorian, executive
director of the Center for Immigration Studies for a presentation of this viewpoint.
Web-Based Exercise
This example requires students to compare two different measures of economic
freedom and to assess what aspects of economic freedom they feel are most important.
This assignment builds on the discussion on the text and also provides an
opportunity to discuss the effects of corruption on economic growth.
The Dimensions of Economic Freedom
Visit the Web site of the Fraser Institute to read its Economic Freedom of the World report. Compare it with the Index of Economic Freedom (from the Heritage
Foundation and The Wall Street Journal) by answering the following:
1) Which are the top ten countries according to each source? (Web sites are
http://www.freetheworld.com/2006/EFWinternational-rls.pdf and http://www.
heritage.org/index/topten.cfm.) 2) What categories are included in each definition of freedom? (You may consult the list of categories in the text for the Fraser Institute; for the Heritage Foundation, see the Web site at http://www.heritage.org/research/features/index/chapters/htm/index2007_chap3.cfm).
Tips
The challenge with regard to this material is how much students may take for
granted about their freedoms and the economy in which they live. Trying to give
them another perspective will help them understand the strengths of the U.S. economy and the challenges of other countries.
HANDOUT 17-1
Immigration: Good or Bad for Productivity?
Growth in the labor force is listed as a major source of long-run economic growth. But what causes the labor force to grow? As noted in the text, immigration is causing the U.S. population to rise faster than anyone thought. Is this good for productivity?
Read the article titled “Keeping Out the Wrong People: Tightened Visa Rules Are Slowing the Vital Flow of Professionals into the U.S.” by Spencer E. Ante in Business Week (October, 2004, pp. 90–94, available on the Web at: http://www.competeamerica.org/news/media_coverage/2004_10/20041004_bw.html.
Then read “The Worker Next Door,” by Barry R. Chiswick in The New York Times, June 3, 2006, p. A23. This article is available on the Web at: http://www.nytimes.com/2006/06/03/opinion/
03chiswick.html?ex=1306987200&en=676f30a3dbaf85e9&ei=5088&partner=rssnyt&emc=rss.
Based on the two articles, assess whether immigration is good or bad for U.S. productivity.
"Mankiw's 10 principles of economics, translated for the uninitiated", by Yoram Bauman, http://www.standupeconomist.com . Presented at the AAAS humor session, February 16, 2007. For the record, the talk contains two unattributed quotes ("9 out of 5" is adapted from a line attributed to Paul Samuelson---although apparently he said it about Wall Street indices, not macroeconomists---and "wrong about things" is paraphrased from P.J. O'Rourke's Eat the Rich) and, of course, the Einstein "simple" quote is an intentional misquote. The talk is based on a published article in Annals of Improbable Research (see http://www.improb.com/airchives/paper... ), which sponsored my talk and to which you should subscribe (http://improb.com/subscribe/ ). In the paper you can see the "constructive example" of how trade can make everyone worse off (or you can just wait 50 years to see what happens with climate change). More info and other clips on my website (http://www.standupeconomist.com ), and please sign up for my email list.
William Baumol. - Air date: 06-12-99
William Jack Baumol (born February 26, 1922) is a New York University economics professor (although he is also affiliated with Princeton University) who has written extensively about labor market and other economic factors that affect the economy. He also made valuable contributions to the history of economic thought. He is among the 500 best economists in the world according to IDEAS/RePEc.
Among his better-known contributions are the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, Baumol's cost disease, which discusses the rising costs associated with service industries, and Pigou taxes.[1]
The 2006 Annual Meetings of the American Economic Association held a special session in his name, and honoring his many years of work, where 12 papers on entrepreneurship were presented. http://www.aeaweb.org/annual_mtg_pape...
The British magazine, The Economist published an article about William Baumol and his lifelong work to develop a place in economic theory for the entrepreneur (March 11, 2006, pp 68), much of which owes its genesis to Joseph Schumpeter. They note that traditional microeconomic theory holds a place for 'prices' and 'firms' but not for that (seemingly) important engine of innovation, the entrepreneur. Baumol is given credit for helping to remedy this shortcoming: "Thanks to Mr. Baumol's own painstaking efforts, economists now have a bit more room for entrepreneurs in their theories."
Baumol is a trustee of the Economists for Peace and Security.
1. The Classical Model, p. 470
Question: The classical model relies on competitive markets for labor, products,
and capital to keep the economy near full employment and output. The United
States has enjoyed nearly 3 decades of high employment, high growth, and low
inflation, interrupted by two short and mild recessions. Has the recent growth in
globalization and trade liberalization introduced more competition into labor, capital, and product markets, making our economy look and act like classical economists envisioned?
The point is to check that students can: relate their understanding of the classical model to changes in the global economy.
2. Sources of Long-Run Economic Growth, p. 470
Question: In 2006, Warren Buffett, the world's second richest individual, announced that over the next few years he would be giving 85% of his wealth, over $30 billion, to the Bill and Melinda Gates Foundation. The foundation focuses on grants to developing nations, helping the poorest of the poor. What suggestions would you give the Foundation to help these developing nations grow?
The point is to check that students can: relate the factors that affect long-run economic growth to the activities of a foundation like the Gates Foundation.
