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Copyright (c) 2000 by Harcourt Inc. All rights reserved. Next page Slides to Accompany Economics: Public and Private Choice 9th ed. James Gwartney, Richard.

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Presentation on theme: "Copyright (c) 2000 by Harcourt Inc. All rights reserved. Next page Slides to Accompany Economics: Public and Private Choice 9th ed. James Gwartney, Richard."— Presentation transcript:

1 Copyright (c) 2000 by Harcourt Inc. All rights reserved. Next page Slides to Accompany Economics: Public and Private Choice 9th ed. James Gwartney, Richard Stroup, and Russell Sobel Economic Growth Chapter 16

2 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 1. The Importance of Economic Growth

3 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. A A C apital G oods Y 1990 R eal G DP PP SRAS 1990 AD 1990 LRAS 1990 P rice L evel C onsumption G oods 1990 P 1 P 1 AD 2000 SRAS 2000 LRAS 2000 B B PP 2000 Y The Importance of Economic Growth n Economic growth expands the sustainable output rate (Y F ) of an economy. n This can be illustrated by either an outward shift in the production possibilities curve... or an increase in long-run aggregate supply (a shift from LRAS 1990 to LRAS 2000 ). n If monetary policy maintains the initial price level (P 1 ), equilibrium real GDP will increase from Y 1990 to Y 2000.

4 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Source: Robert Summers and Alan Heston, Penn World Tables (Cambridge: National Bureau of Economic Research, 1994). These data were through 1992. They were updated to 1997 by the authors. P er- C apita I ncome (in Thousands of 1985 U.S. Dollars) 50152010 1960 1997 Argentina Venezuela Japan Hong Kong 4,462 6,338 2,954 2,247 6,505 6,33315,900 19,774 The Importance of Economic Growth n Differences in sustained growth rates over 2 or 3 decades will substantially alter the relative incomes of countries. n The per-capita incomes for Argentina, Venezuela, Japan, and Hong Kong in 1960 are indicated below. n Note how the more rapid growth rates of the two Asian nations drastically altered their relative incomes compared to those of the two Latin American countries. n During the 1960-1997 period, the per capita growth rates of Argentina and Venezuela were 1% and 0.1% respectively... in contrast, the annual growth rates of Japan and Hong Kong were 4.7% and 6% respectively.

5 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. The Importance of Economic Growth n The Rule of 70: u Dividing 70 by a countrys average growth rate gives the number of years required for an income level to double. u Example: If the U.S. had a growth rate of 2.5%, how many years would it take for the income level of the U.S. to double? 70 2.5 = 28 28 Years.

6 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 2. Differences in Growth Rates Among Nations

7 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. The Growth Of Per-capita GDP (1980–1998) Of High-income Industrial Countries, High-Growth LDCs, And Low-Growth LDCs High- Growth LDC S a High-Income Industrial Countries Growth Of Per-capita GDP 1980–1998 Low Growth LDC S b Growth Of Per-capita GDP 1980–1998 Growth Of Per-capita GDP 1980–1998 Source: Derived from World Bank, World Tables, CD-Rom. Only countries with a population of 2 million or more are included in this table. In a few cases, the 1998 data were unavailable. When this was true, the growth rate was for the 1980-1997 period. Japan United Kingdom Germany United States Australia Italy France Netherlands Canada Switzerland 2.3 1.9 1.8 1.7 1.5 1.1 0.7 Congo (Zaire)-5.3 Togo-4.1 Niger-3.9 Haiti-3.6 Nicaragua-3.0 Madagascar-3.0 Cameroon-2.8 Côte dlvoire-2.6 Zambia-2.3 Romania-2.2 China8.2 South Korea6.4 Taiwan5.4 Singapore5.4 Thailand4.9 Ireland4.3 Hong Kong4.2 Differences in Growth Rates Among Nations n The fastest growing countries in the world are LDCs... n The growth of LDCs (less- developed countries) is characterized by diversity. although other LDCs are doing very poorly.

8 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 3. Sources of Economic Growth

9 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Sources of Economic Growth n Investment in physical and human capital n Technological advances n Institutions and policies consistent with efficient economic organization, such as: u Secure property rights and political stability, u Competitive markets, u Stable money and prices, u Free trade, u Open capital markets, and, u Avoidance of high marginal tax rates.

10 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 4. The Size of Government and Economic Growth

11 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. The Size of Government and Economic Growth n A Government that focuses on protective and productive activities in which it has a comparative advantage, can enhance growth. n Continued growth of government will eventually exert a negative impact on the economy, for 4 major reasons: u Higher taxes and/or additional borrowing will impose increasing deadweight losses on the economy. u Diminishing returns will cause the rate of return derived from government activities to fall. u The political process is much less dynamic than the market process. u A larger government becomes more heavily involved in the redistribution of income and regulatory activities.

12 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 0 3 6 S ize of G overnment (As a Percent of GDP) G rowth R ate of the E conomy B A Size of GovernmentGrowth Curve n If governments undertake activities in the order of their productivity, governments would, at first, promote economic growth (increasing the size of government from A to B)... at some point, though, additional expenditures eventually would retard growth (increasing the size of government beyond B decreases the growth rate of the economy).

13 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Growth = 7.84 - 1.16 (Govt Expenditures) (-9.68) Adj. R-Sq =.53 Linear trend Government Spending and Economic Growth Among OECD Countries: 1960-1996 n Here we show the relationship between the size of government at the beginning of the decade and the growth rate of real GDP for that decade (by decade for the 1960s, 70s, 80s, and 90s). n These data indicate that a 10% increase in government expenditures as a share of GDP reduces the annual rate of growth by about 1%.

14 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 5. Economic Freedom and Growth

15 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Economic Freedom and Growth n Economists since the time of Adam Smith have generally argued that freer economies are likely to be more productive. n Economic freedom is complex and very difficult to measure. n The Fraser Institute has developed a measure of economic freedom. Their index indicates that economic freedom is highest with: u consistency of the legal structure, u policies with secure property, u monetary stability, u free trade, and, u reliance on markets.

16 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. The Most Free And Least Free Economies In The World 03 Ireland 8 Luxembourg 8 Australia 8 Panama 8 Netherlands 8 Argentina 7 Canada 6 Unit. Kingdom 5 United States 4 New Zealand 3 Singapore 2 Hong Kong 1 6903 Myanmar 119 Guin.-Bissau 118 Congo, Dem. 117 Rwanda 116 Albania 113 Sierra Leone 113 Malawi 113 Romania 108 Madagascar 108 Algeria 108 C. Afr. Rep. 108 Ukraine 108 69 Source: James Gwartney and Robert Lawson, Economic Freedom of the World: 1998-1999 Interim Report. Most Free EconomiesLeast Free Economies 4.2 4.1 3.5 3.2 3.1 2.5 8.6 8.7 8.8 9.0 9.1 9.2 9.4 9.6 n The Fraser Institute was able to assemble the required data to rate the economic freedom of 119 economies in 1997. The summary ratings presented here are based on data for 25 different components designed to identify the consistency of institutions and policies with economic freedom. The country ratings varied greatly. n Note that this index was designed to measure economic freedom rather than political freedom, civil liberties, or degree of democracy. The Most and Least Free Economies of the World

17 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 1995 Economic Freedom Quintile 0 20 10 54321 1995 Economic Freedom Quintile -3 5 6 4 3 2 1 0 -2 54321 T housands Source: James Gwartney and Robert Lawson, Economic Freedom of the World: 1998-1999 Interim Report. 2541 3057 6385 12369 14829 -1.9 0.1 1.1 1.8 2.9 n Countries with more economic freedom, as measured by the Freedom Index in 1995, also had higher than average per capita GDP and more rapid average growth rates during 1985-1995. Economic Freedom and Economic Growth (a) Per-capita GDP (1995 U.S. dollars)(b) Growth of real GDP per capita, 1985–1996

18 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 6. Is the Growth Trend of the U.S. Changing?

19 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 4.4 3.2 2.0 2.8 1.2 2.5 1.5 Despite the unprecedented stability of the U.S. economy during the past 15 years, the average growth rate of real GDP has fallen during each of the last three decades. The growth of output per hour worked during the 80s and 90s was less than half the rate achieved during the 60s. Is the Growth Trend in the U.S. Changing?

20 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. Is the Growth Trend in the U.S. Changing? n Factors favorable to economic growth in the U.S. include: u the persistent low rate of inflation, u freer international trade, u a smaller share of output going to government, and, u the fact that a large part of the work force is just moving into their most productive years. n These favorable factors may now be exerting a positive impact on growth: u During 1995-1998, the average growth rate of real GDP was 3.5%, better than that of the 70s and 80s. u The next couple of years will tell whether the recent upturn in growth is temporary or more long-term.

21 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. 1. What can government do to promote economic growth? Is the role of government important? Why or why not? As the size of government increases as a share of the economy, how is the growth rate of real GDP likely to be affected? Questions for Thought: 2. Discuss the importance of the following as determinants of economic growth: (a) natural resources, (b) physical capital, (c) human capital, (d) technological advances, and, (e) economic policy. 3. Since government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises. Evaluate this view.

22 Jump to first page Copyright (c) 2000 by Harcourt Inc. All rights reserved. End Chapter 16


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