Economic Growth and the Wealth of Nations Chapter 16
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1 Economic Growth and the Wealth of Nations Chapter 16 4/17/2017Economic Growth and the Wealth of Nations Chapter 16
2 The Importance of Economic Growth 4/17/2017The Importance of Economic GrowthPer capita GDP is the nation’s GDP divided by its population. Growth of per capita GDP means more goods and services per person.In most cases, higher levels of per capita GDP will mean that the typical person has a better diet, improved health and access to medical services, a longer life expectancy, and greater educational opportunity.
3 The Importance of Economic Growth 4/17/2017The Importance of Economic GrowthEconomic growth expands the sustainable output rate YF of an economy.Consumption goodsPrice LevelLRAS1995LRAS2005PPC2005BSRAS1995SRAS2005AD2005APPC1995P1AD1995Capital goodsReal GDPAYF1995YF2005
4 Per-Capita Income (in thousands of 1985 U.S. Dollars) 4/17/2017Per-Capita Income (in thousands of 1985 U.S. Dollars)196020024,4626,338Argentina5,6835,585Venezuela2,9542,247Japan16,27119,618Hong KongSource: Robert Summers and Alan Heston, Penn World Tables, Mark 5.6 (Cambridge: National Bureau of Economic Research, 1994); and World Bank, World Development Indicators, CD-ROM, 2004.
5 Growth Rates among Nations 4/17/2017Differences inGrowth Rates among NationsThe growth of per-capita GDP for high-income industrial countries,high-growth LDCs, and low-growth LDCs, (1980–2002)High-growth LDCsHigh-income industrialLow-growth LDCsChina8.1%United Kingdom2.2%Congo (Zaire)-4.9%South Korea6.1%Japan2.1%Sierra Leone-3.3%Taiwan6.0%Australia1.9%Haiti-2.8%Ireland4.8%United States1.9%Madagascar-2.1%Botswana4.6%Netherlands1.8%Niger-2.0%Thailand4.6%Italy1.8%Côte d’lvoire-1.8%Mauritius4.4%France1.7%Togo-1.7%Singapore4.2%Germany1.7%Nicaragua-1.4%Hong Kong3.7%Canada1.6%Venezuela-1.3%India3.6%Switzerland0.7%Nigeria-1.1%Sources: Derived from World Bank, World Development Indicators, CD-ROM, 2004; and Republic of China, Statistical Yearbook of the Republic of China, Only countries with a population of 2 million or more in 2002 are included in this table.
6 Questions for Thought: 4/17/2017Questions for Thought:1. Which of the following is true?a. The fastest-growing economies in the world are mostly less developed countries.b. The slowest growing countries in the world, many of which are experiencing declines in per capita GDP, are less developed countries.2. “Other things constant, low income countries should be able to grow rapidly because they can either emulate or import at a low cost proven technologies from countries with higher incomes.”-- Is this statement true?
7 Sound Institutional Environment 4/17/2017Key Elements of aSound Institutional EnvironmentThe following institutional elements are keys to the growth process:secure property rights and political stability,competitive markets,stable money and prices,free trade,open capital markets, and,avoidance of high marginal tax rates.
8 Role of Government and Economic Progress 4/17/2017Role of Governmentand Economic ProgressThe economic, political, and legal environment is a major determinant of economic growth.Governments help promote economic growth when they focus on two core functions:Provision of a legal, regulatory, and monetary environment that enforces contracts and protects people and their property from the actions of aggressors (both domestic and foreign), and,Provision of a limited set of public goods like roads and national defense that are difficult to provide through markets.
9 Role of Government and Economic Progress 4/17/2017Role of Governmentand Economic ProgressAs governments expand beyond these core functions, however, the beneficial affects will eventually wane and become negative.
10 Size of government (percent of GDP) 4/17/20173%6%Size of government (percent of GDP)Growth rate of the economyABIf governments undertake activities in the order of their productivity, the growth of government will initially promote economic growth (move from A to B).At some point, however, continued expansion of government will retard growth (moves beyond B).
11 Big vs. Small-Government Countries 4/17/2017Economic Growth:Big vs. Small-Government CountriesCountries w/ government spendinggreater than 48% of GDP ( )Average annual growth rate of GDP,Sweden58.2%1.8%Denmark55.7%2.0%France53.3%1.8%Austria52.1%2.2%Finland50.2%1.7%Belgium50.2%1.9%Italy48.3%1.5%Average52.6%1.8%Countries w/ government spendingless than 37% of GDP ( )Average annual growth rate of GDP,Australia36.2%3.3%United States34.6%2.9%Ireland33.8%6.8%Average34.9%4.3%The average annual growth rate of OECD countries for the 1990 to 2003 period was greater for small government countries than for large government countries.
12 Questions for Thought: 4/17/2017Questions for Thought:1. “Most low income countries are poor because they lack the necessary natural resources for development.”-- Is this statement true?2. “In recent decades the highest rates of economic growth have been achieved by high income countries with the largest government expenditures as a share of GDP.” Is this statement true?
13 Questions for Thought: 4/17/2017Questions for Thought:3. Which of the following is most important if a country is going to achieve and sustain rapid economic growth?a. large government expenditures as a % of GDPb. institutions & policies supportive of competition (open markets) and freedom of exchangec. free elections and political democracy4. The growth records of Japan and Hong Kong during the last 50 years indicate that an economy can grow rapidly without:a. securely defined property rightsb. abundant domestic resourcesc. significant capital formationd. adopting modern technology
14 Questions for Thought: 4/17/2017Questions for Thought:5. Which of the following is true?a. International trade makes it possible for a nation to use more of its resources producing items it can supply economically and less producing goods that can be supplied domestically only at a high cost.b. Trade barriers such as tariffs and import quotas will protect domestic jobs, expand employment, and help a nation achieve a higher standard of living.