Page 429 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:

Module 39 • The factors that explain why
long-run growth rates differ
so much among countries
Growth Policy: • The challenges to growth

posed by scarcity of natural
resources, environmental
Why Economic degradation, and efforts to
make growth sustainable

Growth Rates Differ

Why Growth Rates Differ

In 1820, according to estimates by the economic historian Angus Maddison, Mexico
had somewhat higher real GDP per capita than Japan. Today, Japan has higher real
GDP per capita than most European nations and Mexico is a poor country, though by
no means among the poorest. The difference? Over the long run, real GDP per capita
grew at 1.9% per year in Japan but at only 1.2% per year in Mexico.
As this example illustrates, even small differences in growth rates have large conse-
quences over the long run. So why do growth rates differ across countries and across
periods of time?

Capital, Technology, and Growth Differences

As one might expect, economies with rapid growth tend to be economies that add
physical capital, increase their human capital, or experience rapid technological
progress. Striking economic success stories, like Japan in the 1950s and 1960s or China
today, tend to be countries that do all three: that rapidly add to their physical capital,
upgrade their educational level, and make fast technological progress.
Adding to Physical Capital One reason for differences in growth rates among coun-
tries is that some countries are increasing their stock of physical capital much more
rapidly than others, through high rates of investment spending. In the 1960s, Japan
was the fastest -growing major economy; it also spent a much higher share of its GDP
on investment goods than other major economies. Today, China is the fastest -growing
major economy, and it similarly spends a very large share of its GDP on investment
goods. In 2009, investment spending was 44% of China’s GDP, compared with only
18% in the United States.

module 39 Growth Policy: Why Economic Growth Rates Differ 387