1. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Understanding Economics 5th edition by Mark Lovewell

2. Chapter 10 Economic Fluctuations Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 5 th edition by Mark Lovewell

3. Learning Objectives After this chapter you will be able to: 1. identify aggregate demand and the factors that affect it 2. distinguish aggregate supply and the factors that influence it 3. understand the economy’s equilibrium and how it differs from its potential 4. define economic growth, its sources and its impact 5. summarize Canada’s historical record of economic growth Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

4. Aggregate Demand (a) Aggregate demand (AD): is the relationship between the general price level and real expenditures (i.e. total spending) in an economy is shown as a schedule or curve Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

5. Aggregate Demand (b) Figure 10.1, Page 260 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0650700750800 40 80 120 160 200 Aggregate Demand Curve Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) Aggregate Demand Schedule Price Level Real GDP (2002, $ billions) Point on Graph 200 160 120 650 700 750 a b c a b c AD

6. The Aggregate Demand Curve Two factors cause the aggregate demand curve to be downward sloping: The wealth effect means that higher prices decrease the real value of financial assets and decrease consumption, since households feel poorer (and vice versa for lower prices). The foreign trade effect means that higher prices decrease exports and increase imports (and vice versa for lower prices). Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

7. Changes in Aggregate Demand (a) Aggregate demand changes are shown by shifts in the AD curve. An increase in spending causes a rightward shift in the AD curve. A decrease in spending causes a leftward shift in the AD curve. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

8. Changes in Aggregate Demand (b) Figure 10.2, Page 262 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0650700750800 40 80 120 160 200 Aggregate Demand Curve Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 160 120 650 700 750 700 750 800 Aggregate Demand Schedule Price Level Real GDP (2002 $ billions) AD 0 AD 1 AD 0 AD 1

9. Aggregate Demand Factors (a) AD changes are caused by aggregate demand factors related to each of the four main spending components: consumption (C) disposable income wealth (other than wealth changes caused by a varying price level) consumer expectations interest rates Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

10. Aggregate Demand Factors (b) investment (I) interest rates business expectations government purchases (G) net exports (X-M) foreign incomes exchange rates Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

11. Investment Demand (a) Investment demand is the relationship between the interest rate and investment and depends on the real rate of return and the real interest rate. Businesses pursue projects whose real rate of return at least equals the real interest rate, which means the investment demand curve is downward-sloping, since more projects are profitable at lower interest rates. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

12. Investment Demand (b) Figure 10.3, Page 264 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 Investment Demand Curve Investment (2002 $ billions) Real Rate of Return and Real Interest Rate (%) 3060 4 8 12 ABCD a b c D1D1 Investment Demand Schedule Real Interest Rate (%) Total Investment (2002 $ billions) Point on Graph Projects Undertaken 12 8 4 0 30 60 a b c -- A, B A, B, C, D

13. Shifts in the Aggregate Demand Curve Figure 10.4, Page 266 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. (1)An increase in consumption due to (a)a rise in disposable income (b)a rise in wealth unrelated to a change in price level (c)an expected rise in prices or incomes (d)a fall in interest rates (2)An increase in investment due to (a)a fall in interest rates (b)an expected rise in profits (3)An increase in government purchases (4)An increase in net exports due to (a)a rise in foreign income (b)a fall in value of the Canadian dollar Aggregate demand increases and the AD curve shifts to the right, with the following: (1)A decrease in consumption due to (a)a fall in disposable income (b)a fall in wealth unrelated to a change in price level (c)an expected fall in prices or incomes (d)a rise in interest rates (2)A decrease in investment due to (a)a rise in interest rates (b)an expected fall in profits (3)A decrease in government purchases (4)A decrease in net exports due to (a)a fall in foreign income (b)a rise in value of the Canadian dollar Aggregate demand decreases and the AD curve shifts to the left, with the following:

14. Aggregate Supply (a) Aggregate supply (AS) is: the relationship between the general price level and real output in an economy shown as a schedule or curve Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

15. Aggregate Supply (b) Figure 10.5, Page 268 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Aggregate Supply Schedule Price Level Real GDP (2002, $ billions) Point on Graph 120 160 200 240 650 700 725 730 a b c d 0 650675700 40 80 120 160 240 Aggregate Supply Curve Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 730 725 a b c d AS Potential Output

16. The Aggregate Supply Curve The AS curve is upward-sloping because higher prices encourage businesses to produce more, while at lower prices businesses are forced to reduce output. The AS curve becomes steep above potential output because a relatively large increase in the price level is required if businesses are to increase output in this range. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

17. Short-Run Changes in Aggregate Supply Short-run AS changes are shown by shifts in the AS curve and a constant potential output for the economy. A short-run increase in AS occurs when the AS curve shifts rightward while potential output stays constant. A short-run decrease in AS occurs when the AS curve shifts leftward while potential output stays constant. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

18. A Short-Run Change in Aggregate Supply Figure 10.6, page 269 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 650675700 40 80 120 160 240 Aggregate Supply Curve Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 750 725 AS 0 Potential Output AS 1 120 160 200 240 650 700 725 730 700 725 730 731 Aggregate Supply Schedule Price Level Real GDP (2002 $ billions) AS 0 AS 1

19. Long-Run Changes in Aggregate Supply Long-run AS changes are shown by shifts in both the AS curve and in potential output. A long-run increase in AS occurs when the AS curve and potential output both shift rightward. A long-run decrease in AS occurs when the AS curve and potential output both shift leftward. Copyright © 2090 by McGraw-Hill Ryerson Limited. All rights reserved.

20. A Long-Run Change in Aggregate Supply Figure 10.7, Page 269 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 650725 40 80 120 160 240 Aggregate Supply Curve Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 775 New Potential Output Original Potential Output AS 0 AS 1 120 160 200 240 650 700 725 730 700 750 775 780 Aggregate Supply Schedule Price Level Real GDP (2002 $ billions) AS 0 AS 1

21. Aggregate Supply Factors AS changes are caused by aggregate supply factors related either to short-run or long-run trends. Short-run changes in AS are caused by varying input prices. Long-run changes in AS are caused by varying: resource supplies productivity government policies Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

22. Shifts in the Aggregate Supply Curve (a) Figure 10.8, Page 271 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. (1)A decrease in input prices due to (a)a fall in wages (b)a fall in raw material prices Aggregate supply increases, with the AS curve shifting to the right, and potential output staying the same with the following: (1)An increase in input prices due to (a)a rise in wages (b)a rise in raw material prices Aggregate supply decreases with the AS curve shifting to the left, and potential output staying the same with the following:

23. Shifts in the Aggregate Supply Curve (b) Figure 10.8, Page 271 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. (1)An increase in supplies of economic resources due to (a)more labour supply (b)more capital stock (c)more land (d)more entrepreneurship (2)An increase in productivity due to technological progress (3)A change in government policies (a)lower taxes (b)less government regulation Aggregate supply increases, with the AS curve shifting to the right, and potential output increasing with the following: (1)A decrease in supplies of economic resources due to (a)less labour supply (b)less capital stock (c)less land (d)less entrepreneurship (2)A decrease in productivity due to technological decline (3)A change in government policies (a)higher taxes (b)more government regulation Aggregate supply decreases, with the AS curve shifting to the left, and potential output decreasing with the following:

24. Equilibrium in the Economy (a) An economy’s equilibrium occurs at the intersection of the AD and AS curves. A price level above equilibrium means an unintended increase in inventories (or positive unplanned investment), lowering the price level towards equilibrium. A price level below equilibrium leads to an unintended decrease in inventories (or negative unplanned investment), raising the price level towards equilibrium. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

25. An Economy at Equilibrium Figure 10.9, Page 273 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 700 160 0 650800 40 80 120 200 Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 750 Aggregate Demand and Supply Curves Positive Unplanned Investment Negative Unplanned Investment Aggregate Demand and Supply Schedules Price Level AS – AD (surplus (+) or shortage (-)) (2002 $ billions) AS AD aa b c c 200 160 120 (725 – 650) = +75 (700 – 700) = 0 (650 – 750) = -100

26. Equilibrium in the Economy (b) An economy’s equilibrium occurs at a point where total injections (I+G+X) equal total withdrawals (S+T+M). When total injections exceed total withdrawals then real output and spending expand until a new balance is achieved. When total withdrawals exceed total injections then real output and spending contract until a new balance is achieved. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

27. An Economy at Its Potential Output Figure 10.10, Page 275 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 40 80 120 160 240 Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 725 Potential Output AS AD

28. Recessionary and Inflationary Gaps A recessionary gap: occurs when equilibrium output falls short of potential output, and is associated with an unemployment rate above the natural rate An inflationary gap: occurs when equilibrium output exceeds potential output, and is associated with an unemployment rate below the natural rate as well as increased pressure on prices Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

29. Recessionary and Inflationary Gaps Figure 10.11, Page 276 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 40 80 120 160 240 Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 725700 Recessionary Gap 0 40 80 120 160 240 Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 200 730725 Inflationary Gap Recessionary Gap Potential Output AS AD AS AD Potential Output Inflationary Gap

30. Economic Growth (a) Economic growth can be defined in two ways: The percentage increase in an economy’s total output (e.g. real GDP) is most appropriate when measuring an economy’s overall productive capacity. The percentage increase in per capita output (e.g. per capita real GDP) is most appropriate when measuring living standards. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

31. Economic Growth (b) Economic growth can also be portrayed using the production possibilities curve in two ways: an outward shift in the production possibilities curve due to technological change or an increase in economic resources a movement towards the curve because not all resources have been employed or used to their fullest capacity Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

32. The Process of Economic Growth Figure 10.12, Page 278 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. PPC 1 PPC 0 a Lasers Hamburgers 120 40

33. Production Options and Their Implications Figure 10.13, Page 279 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. a Lasers Hamburgers 12 0 40 250 Country A b PPC PPC A Lasers Hamburgers 12 0 100 200 Country B c d PPC PPC B

34. The Rule of 72 The Rule of 72: shows the effects of exponential growth states that the number of years it takes a variable to double can be estimated by dividing 72 by the variable’s annual percentage change Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

35. GDP and Growth Rates Figure 10.14, Page 280 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Year 1$ 100.00 billion$100.00 billion Year 2102.00 billion104.00 billion Year 3104.04 billion108.16 billion Year 4 106.12 billion112.49 billion Year 5 108.24 billion116.99 billion Year 6 110.41 billion121.67 billion Year 7 112.62 billion126.53 billion Year 8 114.87 billion131.59 billion Year 9 117.17 billion136.86 billion Year 10 119.51 billion142.33 billion Year 11121.90 billion148.02 billion Real GDP in Country X (2% annual growth in real GDP) Real GDP in Country Y (4% annual growth in real GDP)

36. Sources of Economic Growth (a) A main cause of growth in Canada’s real output is the increase in the quantity of labour. Growth in per capita output is closely associated with growth in labour productivity, which depends on six factors: the quantity of capital technological progress the quality of labour efficiency in production Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

37. Sources of Economic Growth (b) the quantity of natural resources social and political factors Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

38. Labour Productivity Growth in Selected Countries (1973-2006) Figure 10.15, Page 281 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

39. The Benefits of Growth There are three main advantages of economic growth: its positive effect on living standards its possible effect on social improvements its psychological benefits Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

40. The Costs of Growth There are three main disadvantages of economic growth: its opportunity cost in terms of sacrificed current consumption its environmental costs its social costs Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

41. Canada’s Economic Growth (a) Figure 10.16, Page 287 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

42. Economic Growth in Canada Before World War I (1870-1914), Canada’s per-capita output (in 1997 dollars) more than doubled from $2312 to $5283. In the interwar period (1914-1945), the country’s per- capita real output almost doubled from $5283 to $9660. In the postwar period (1945-), per-capita real output has increased more than four times. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

43. Business Cycles (a) The business cycle is the cycle of expansions and contractions in an economy. An expansion is a sustained rise in real output. A contraction is a sustained fall in real output. A peak is the point in the business cycle at which real output is at its highest. A trough is the point in the business cycle at which real output is at its lowest. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

44. The Business Cycle Figure 10.17, Page 288 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Real GDP Time EXPANSION CONTRACTION Long-Run Trend of Potential Output Recessionary gap Inflationary gap Peak Trough a b c d

45. Contractions A contraction: is usually caused by a decrease in AD magnified by the reactions of both households and businesses, who spend less due to pessimism about the future may be a recession, which is a decline in real output for six months or more may be a depression, which is a particularly long and harsh period of reduced real output Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

46. Expansions An expansion is usually caused by an increase in AD magnified by the reactions of both households and businesses as they spend more due to more optimistic expectations of the future. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

47. Expansion and Contraction Figure 10.18, Page 289 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 700725 160 240 Real GDP (2002 $ billions) Price Level (GDP deflator, 2002 = 100) 730 e f AS AD 0 Potential Output AD 1 Inflationary Gap Recessionary Gap

48. The Aggregate Expenditures Model The aggregate demand and aggregate supply approach highlights the impact of price changes on spending and output. In contrast, the aggregate expenditures model focuses on individual spending components while assuming that the price level is constant. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

49. Consumption and Saving (a) Households divide their disposable income (DI) between consumption (C) and saving (S). We assume the only component of C to change with DI is purchases of domestically produced goods. Then the effect of a change in DI on consumption is shown by MPC and the effect on saving is shown by MPS. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

50. Consumption and Saving (b) When defined relative to disposable income, both MPC and MPS must sum to one. For example, if a $200 billion increase in DI raises C by $150 billion, then MPC is 0.75 (or $150 b. divided by $200 b.). Meanwhile, the remaining $50 is saved, which means that MPS is 0.25 (or $50 b. divided by $200 b.). Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

51. Consumption and Saving Figure A, page 297 Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. $800b. $1250b. $150b. S C $200b. -$200b. 400 1400 1200 1000 800 600 400 200 0 140012001000800600200 Disposable Income ($ billions) Consumptions, Savings ($ billions) -200 Consumption and Saving Lines Consumption and Saving Schedules DI C ($ billions) S 0 200 400 600 800 1000 1200 1400 200 350 500 650 800 950 1100 1250 -200 -150 -100 -50 0 50 100 150

52. The Spending-Output Approach (a) In a private economy with no government purchases or taxes, DI and GDP are equal. Using the spending-output approach, equilibrium occurs where the aggregate expenditures (AE) line meets the 45-degree line passing through the origin. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

53. The Spending-Output Approach (b) Along the 45-degree line, all output produced is purchased. At GDP levels below the equilibrium level, there is negative unplanned investment, since AE exceeds the 45-degree line. GDP expands until equilibrium is attained. At GDP levels above the equilibrium level, there is positive unplanned investment, since AE is below the 45-degree line. GDP contracts until equilibrium is attained. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

54. Equilibrium with No Government (a) Figure B, page 298 (continued in part (b)) Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 0 200 400 600 800 1000 1200 1400 200 350 500 650 800 950 1100 1250 25 Spending-Output Approach GDPCIX-MAE ($ billions) 25 250 400 550 700 820 1000 1150 1300 Expenditures ($ billions) 400 200 0 140012001000800600400200 GDP ($ billions) 600 800 1000 1200 1400 -$50 b. negative unplanned investment -$50 b. positive unplanned investment AE 0 = C + I + (X – M) C a 45°

55. The Injections-Withdrawals Approach (a) Using the injections-withdrawals approach, equilibrium is found where total injections (I+X) equal total withdrawals (S+M). This approach gives the same equilibrium GDP as does the spending-output approach. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

56. Equilibrium with No Government (b) Figure B, page 298 (continued from part (a)) Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. I+X S 140012001000800600400200 Injections, Withdrawals ($ billions) 400 200 0 GDP ($ billions) -200 600 S+M I b 0 200 400 600 800 1000 1200 1400 -200 -150 -100 -50 0 50 100 150 25 Injections-Withdrawals Approach GDPMSS+MIXI+X ($ billions) 350 150 200 250 300 350 400 450 500 375 400

57. Making an Economy Grow Paul Romer: has devised a new growth theory which emphasizes the role of knowledge as an integral factor of production along with labour and capital argues that new ideas should be given a low price to stimulate further discoveries Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

58. Economic Development (OLC) The World’s Rich and Poor The World Bank classifies nations into three groups based on their per capita GNP (2007 figures): high-income countries (US$11456 or more) middle-income countries (US$936 to $11455) low-income countries (US $935 or less) Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

59. Economic Development (OLC) Indicators of Living Standards for Selected Countries (a) Figure B Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. High-Income Countries 1.Sweden46 0601.89793…5.9 2.U.S.44 040-2.1307758…20.6 3.Canada39 4201.733796…20.0 4.Japan37 6701.5128784…9.8 All high-income countries37 5662.010567679913.1 Per Capita GNP (2007) Average Annual Growth Rate (%) (2006-2007) Population (millions) Life Expectancy at Birth (years, 2006) Infant Mortality (per 1000 live births) (2006) Adult Illiteracy (females %) (2005) Carbon Dioxide Emissions per capita (metric tonnes) (2004)

60. Economic Development (OLC) Indicators of Living Standards for Selected Countries (b) Figure B Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Middle-Income Countries 1.Hungary11 5701.510697…5.7 2.Mexico8 3402.31057235924.3 3.China2 36011.213207024913.9 4.India9507.711236376611.2 All middle-income countries2872 6.942606749903.2 Per Capita GNP (2007) Average Annual Growth Rate (%) (2006-2007) Population (millions) Life Expectancy at Birth (years, 2006) Infant Mortality (per 1000 live births) (2006) Adult Illiteracy (females %) (2005) Carbon Dioxide Emissions per capita (metric tonnes) (2004)

61. Economic Development (OLC) Indicators of Living Standards for Selected Countries (c) Figure B Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Low-Income Countries 1.Yemen8700.62261100541.0 2.Papua New Guinea8504.265573550.4 3.Bangladesh4704.81506369470.3 4.Ethiopia2208.47951123360.1 All low-income countries5784.3129656135610,6 World79582.666126672824.3 Per Capita GNP (2007) Average Annual Growth Rate (%) (2006-2007) Population (millions) Life Expectancy at Birth (years, 2006) Infant Mortality (per 1000 live births) (2006) Adult Illiteracy (females %) (2005) Carbon Dioxide Emissions per capita (metric tonnes) (2004)

62. Economic Development (OLC) The Gap Between Rich and Poor Despite higher average growth rates in low-income countries than in high-income countries, per capita incomes in most low-income countries have risen less quickly in dollar terms. This is because of the relative size of incomes in each group of countries. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

63. Economic Development (OLC) The Dynamics of Development Economic development is an increase in a country’s per capita income accompanied by a rise in living standards for the bulk of the population. Many low-income countries trying to foster economic development are trapped by the vicious cycle of poverty, whereby low living standards result in slow growth, thereby keeping living standards low in the future. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

64. Economic Development The Vicious Cycle of Poverty Figure C Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Low per capita income Low productivity growth Low investment in capital and human resources Rapid population growth Labour-intensive production

65. Economic Development (OLC) Strategies for Development (a) Breaking the vicious cycle of poverty involves three domestic strategies for development: ensuring political and economic stability investing in human capital and capital goods population control Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

66. Economic Development Global Populations Trends Figure D Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. Low- and Middle-Income Countries4 3535 3616 5121.51.2 Sub-Saharan Africa5147261 0332.52.2 East Asia and Pacific1 5961 8702 1081.10.7 South Asia1 1131 4471 8351.91.5 Europe and Central Asia4664734770.10.1 Middle East and Northern Africa2263003992.01.8 Latin America and the Caribbean4385466601.61.2 High-Income Countries9041 0041 0620.80.4 World5 2566 3657 5741.41.1 1990 2020 (estimated) Population (millions) 2004 Estimated Annual; Growth Rate (%) 1990-20042004-2020

67. Economic Development (OLC) Strategies for Development (b) Breaking the vicious cycle of poverty involves two international strategies for development: trade liberalization foreign aid Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

68. Finding the Key (a) (Online Learning Centre) Research on long-term economic growth show that average global living standards hardly changed until a century ago. In 2500 BCE, per capita consumption in today’s dollars was about $270 (US); by 1500 this had risen only slightly to $360 (US); by 1600 it fell to $322 (US), and today it is $3116 (US). Population figures have also risen over the past 100 years, from 1.6 billion in 1900 to 6 billion today. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

69. Finding the Key (b) (Online Learning Centre) According to research on this issue, the growth rates of the past century are due largely to the following two factors: population growth, with more people producing more ideas and knowledge a major improvement in many parts of the world in institutions that promote innovation – in particular property rights for inventors Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

70. A New Capitalist Manifesto (a) (Online Learning Centre) According to Peruvian Economist Hernando de Soto, capital serves not only a technical function but also a social function. Without capital, individuals are unable to exchange, lease and pledge productive assets, which creates obstacles to entrepreneurial activity. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

71. A New Capitalist Manifesto (b) (Online Learning Centre) De Soto claims that large segments of the population of low-income countries live in the extra-legal sector, so cannot gain the advantages from private property rights. To change this, government leadership is required to ensure that extra-legal realities are incorporated in property systems through a grassroots approach. Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved.

72. Chapter 10 The End Copyright © 2009 by McGraw-Hill Ryerson Limited. All rights reserved. 5 th edition by Mark Lovewell