1. The Wealth of Nations and Economic Growth

2. Key Facts about the Wealth of Nations and Economic Growth
Understanding the Wealth of Nations
Incentives and Institutions
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4. Economic growth is a matter of life and death to the 1
Economic growth is a matter of life and death to the 1.8 million children who die of diarrhea each year globally.

5. Key Facts about the Wealth of Nations and Economic Growth
Fact One: GDP per Capita Today Varies Enormously among Nations

6. Hans Rosling debunks myths about the so-called "developing world” with humor, data and visual flair. (19:53 minutes) or shorter talk here (4:48 minutes)
About the video- From TED: Why you should listen to him:
Even the most worldly and well-traveled among us will have their perspectives shifted by Hans Rosling. A professor of global health at Sweden's Karolinska Institute, his current work focuses on dispelling common myths about the so-called developing world, which (he points out) is no longer worlds away from the west. In fact, most of the third world is on the same trajectory toward health and prosperity, and many countries are moving twice as fast as the west did. What sets Rosling apart isn't just his apt observations of broad social and economic trends, but the stunning way he presents them. Guaranteed: You've never seen data presented like this. By any logic, a presentation that tracks global health and poverty trends should be, in a word: boring. But in Rosling's hands, data sings. Trends come to life. And the big picture — usually hazy at best — snaps into sharp focus. Rosling's presentations are grounded in solid statistics (often drawn from United Nations data), illustrated by the visualization software he developed. The animations transform development statistics into moving bubbles and flowing curves that make global trends clear, intuitive and even playful. During his legendary presentations, Rosling takes this one step farther, narrating the animations with a sportscaster's flair. Rosling developed the breakthrough software behind his visualizations through his nonprofit Gapminder, founded with his son and daughter-in-law. The free software — which can be loaded with any data — was purchased by Google in March (Rosling met the Google founders at TED.) Rosling began his wide-ranging career as a physician, spending many years in rural Africa tracking a rare paralytic disease (which he named konzo) and discovering its cause: hunger and badly processed cassava. He co-founded Médecins sans Frontièrs (Doctors without Borders) Sweden, wrote a textbook on global health, and as a professor at the Karolinska Institut in Stockholm initiated key international research collaborations. He's also personally argued with many heads of state, including Fidel Castro. As if all this weren't enough, the irrepressible Rosling is also an accomplished sword-swallower — a skill he demonstrated at TED2007.
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7. Key Facts about the Wealth of Nations and Economic Growth
Wealth and Health go Together.
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005

8. Key Facts about the Wealth of Nations and Economic Growth
Fact Two: Everyone Used to be Poor

9. Key Facts about the Wealth of Nations and Economic Growth
A Primer on Growth Rates
How is economic growth measured?
Where yt is per capita real GDP in year t
Example: Year real GDP per capita
2008 $15,000
$15,500

10. The Rule of 70 (The Magic of Compounding)
Example: If real GDP per capita is growing at an annual growth rate of 3.5%, it will double in:
The moral? Small improvements in growth add up fast (the power of compounding).

11. Let's figure out how long it will take for the average Indian to be as wealthy as the average Western European is today. Note that all numbers are adjusting for inflation. India's GDP per capita is $3,000, and let's say that real output per person there grows at 5 percent per year. Using the rule of 70, how many years will it take for India to reach Italy's current level of GDP per capita, about $24,000 per year?
42 years
14 years
28 years.
12 years
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12. A Little Growth Goes a Long Way

13. Key Facts about the Wealth of Nations and Economic Growth
Fact Three: There are Growth Miracles and Growth Disasters
See for a wealth of interactive (and animated) cross-country data.

14. High tax, generous social safety Low tax, low level of social safety
Would you rather live in a country that has high taxes and a generous social safety net or a country with low taxes and little social safety?
High tax, generous social safety
Low tax, low level of social safety
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15. Understanding the Wealth of Nations
The Factors of Production are important
Physical capital: the stock of tools including machines, structures, and equipment.
Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.
Technological knowledge: knowledge about how the world works that is used to produce goods and services.

16. What Causes Economic Growth?

17. Understanding the Wealth of Nations
Why do some nations have faster growth than others?
Besides factors of production, incentives and institutions matter.
Institutions = “rules of the game” that structure economic incentives.
Institutions of Economic Growth
Property rights
Honest government
Political stability
A dependable legal system
Competitive and open markets

18. Before division after WWII: similar
Korea’s Experiment
Before division after WWII: similar
Culture, physical capital, technology.
North Korea became a communist state with a centrally planned economy.
South Korea adopted the capitalist free market model.

19. North and South Korea at night

20. Without property rights:
Institutions
Property rights:
Provide incentives to work hard.
Encourage investment and innovation.
Without property rights:
Effort is divorced from payment, reducing incentives.
Free riders become a problem.

21. Institutions
Free Rider = someone who consumes a resources without working or contributing to the resource’s upkeep.
China’s “Great Leap Forward”- which introduced farming collectives- reduced incentives million starved.
1978, farmers in Xiaogang met in secret to devise a plan to keep some of their produce. (background photo)
Productivity improved so quickly the government allowed the experiment to proceed.
Food production increased 50% in 5 years

22. Institutions No one must “own” you for economic freedom to exist.
Ownership is right to shape, use, and dispose.
You wouldn’t think you really owned it if the government
The government would be the de facto owner.
Ownership is control, without it you don’t “own” it.
Mongolian Yaks – were owned by the government for decades (the People’s Yaks)
Total Yak population did not change from 1920s to 1990s

23. Institutions – Property Rights
After the collapse of central planning, property rights were assigned.
The Yak population soared from 25 to 32 million in a few short years
When it’s your yak, not “everybody’s” yak, you take care of the yak and make more yaks
You “share” your Yaks with other people with mutually beneficial trades involving yak products. 
“Sharing” when done at gun point (i.e. government confiscation of property) is not the proper term to use.

24. Institutions Honest Government
Property rights are meaningless unless government guarantees property rights.
Corruption bleeds resources away from productive entrepreneurs.
Corruption takes resources away from more productive government activity.
Stalin, not exactly the picture of honest government.

25. Corruption and Growth Don’t go Together
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005

26. Corruption Who’s Who List

27. Institutions Political Stability
Changing governments without the rule of law creates uncertainty which leads to less investment in physical and human capital.
In many nations civil war, military dictatorship, and anarchy have destroyed the institutions necessary for economic growth.
Bullet casings from Liberia’s Civil War: Bad soil for anything to grow.

28. Dependable Legal System
Institutions
Dependable Legal System
A good legal system facilitates contracts and protects property from others (including government).
Poorly protected property rights can result from too much government or too little government.
In India, residents who purchase land have to do so more than once because of lack of proper record keeping.

29. Dependable Legal System “Rule of Law” – crucial to economic growth
Institutions
Dependable Legal System
“Rule of Law” – crucial to economic growth
The rule of law is the general concept that government as well as the governed are subject to the law and that all are to be equally protected by the law.
Otherwise…..worst kinds of corruption
Power does not equal wisdom or good judgment

30. Dependable Legal System
Institutions
Dependable Legal System
Most of human history the rules by which life was governed were usually determined by force and fraud
He who had the power made the rules. Absolute monarch or tyrannical despots
“Divine right of Kings” subjects accepted their rule without question

31. Competitive and Open Markets
Institutions
Competitive and Open Markets
Encourage the efficient organization of resources.
One study found: if India used its physical and human capital as efficiently as the U.S., India would be 4x richer than it is today.
About the talk, from TED: The "dismal science" truly shines in this optimistic talk, as economist Alex Tabarrok argues free trade and globalization are shaping our once-divided world into a community of idea-sharing more healthy, happy, and prosperous than anyone's predictions.

32. India and China come up a lot in this chapter
India and China come up a lot in this chapter. What fraction of humans live in India and China together?
Roughly 1/2 of all humans.
Roughly 1/4 of all humans.
Roughly 1/3 of all humans.
Roughly 1/5 of all humans.
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33. Why do poor countries use their capital inefficiently?
Institutions
Why do poor countries use their capital inefficiently?
Whether inadvertently or not, inefficient and unnecessary regulations:
Create monopolies and impede markets
Example: until recently in India, it was illegal to produce shirts using large-scale production
Economies of scale = the advantages of large-scale production that reduce average cost as quantity increases

34. Think-pair-share: Why do you think expensive red tape is hard to get rid of in many poor countries?
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35. Institutions and Growth Miracles Revisited
Why did England’s Industrial Revolution bring us:
large scale factories
mass production
the steam engine
the railroad
the beginnings of a consumer society
the first sustained rise in human living standards above subsistence?

36. Institutions and Growth Miracles Revisited
Property rights? England’s geography and Navy helped protect property rights Honest government Growth of Parliament (and religious changes) reduced royal tyranny Political stability Middle class developed from growth A dependable legal system Less corruption as royal and Catholic power is reduced Competitive and open markets England opened itself more to trade

37. The GDP per person in both countries is roughly the same.
What is the difference in GDP per person between Nigeria and Argentina?
The GDP per person in both countries is roughly the same.
Argentina's GDP per person is about $9,000 > Nigeria's
Nigeria's GDP per person is about $9,000 > Argentina's
None of the above
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