Chapter 18 Economic Growth and Development Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

18-2 Chapter Outline Growth in Already Developed Countries Comparing Developed Countries and Developing Countries Fostering (and Inhibiting) Development

18-3 You Are Here

18-4 Growth in Already Developed Countries Sources of Growth –Increases in Aggregate Demand –Increases in Aggregate Supply

18-5 Aggregate Demand Variables to Shift Aggregate Demand –Low interest rates –Low taxes –High government spending Government can not make this occur continuously. Eventually, the Classical Range of the Aggregate Supply curve will be reached.

18-6 Increasing Aggregate Demand AD’ AS AD RGDP PI PI* RGDP* PI’ RGDP’

18-7 Aggregate Supply Variables that can shift Aggregate Supply –Wage and Input Costs –Productivity –Technology Wage and Input costs can’t continuously decrease Productivity and Technology can continually increase

18-8 Increases in Aggregate Supply AS AD RGDP PI PI* RGDP* AS’ PI’ RGDP’

18-9 Productivity and GDP Growth

18-10 Comparing Developed Countries and Developing Countries Rich Countries –Are getting richer (faster GDP growth) –Have more evenly divided incomes (lower GINI coefficients) –GDP is produced by services, then industry (agriculture insignificant) –Lower Inflation Poor Countries –Have lower GDP growth rates –Have highly uneven incomes –Agriculture is an important part of GDP –Have higher levels of inflation

18-11 Fostering (and Inhibiting) Development Solow growth model predicted convergence of income. Evidence shows this is not occurring. Political and institutional problems inhibiting growth

18-12 The Challenges Facing Developing Countries Low Rates of Basic Literacy Lack of Infrastructure Political Instability Corruption Lack of Independent Central Banking Inability to Repatriate Profits A Need to Focus on the Basics

18-13 Success Stories Japan –Solid financial institutions –Education –Few Resources China –Resources –Cheap labor South Korea –Liberalized political institutions –Solid financial insituttions Saudi Arabia & Kuwait –Oil

18-14 What Works Basic Building Blocks –education, –a low or manageable level of government corruption, –a level of political and financial stability Creates confidence among foreign investors