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Macro Chapter 17 Institutions, Policies, and CrossCountry Differences in Income and Growth 2 Learning Goals 1) Explain how economic freedom and growth are related 2) Identify the benefits of economic freedom How Large Are the Income Differences across Countries? How Do Growth Rates Vary across Countries? Why? 2 major reasons: 1) Institutions (see Chapter 16) 2) Economic Freedom Economic Freedom as a Measure of Sound Institutions Institutions, Policies, and Economic Performance Economic Freedom Method of organizing economy with the following characteristics: 1) Personal choice 2) Market-based voluntary exchange 3) Competitive entry into markets 4) Private property Main point: the government’s policies and involvement in the economy are important, but too much government intervention can harm growth Q17.1 Economic theory indicates that the size of government will be 1. unrelated to economic growth. 2. negatively related to economic growth at all possible sizes of government. 3. positively related to economic growth at all possible sizes of government. 4. positively related to economic growth at small levels of government but is negatively related to economic growth at large levels of government. Major Conclusion: The more free the economy is, the higher the growth rate will be The 2011 EFW report reveals the US is now in 10th place with a rating of 7.60 “The world’s largest economy, the United States, has suffered one of the largest declines in economic freedom over the last 10 years, pushing it into tenth place. Much of this decline is a result of higher government spending and borrowing and lower scores for the legal structure and property rights components. Over the longer term, the summary chainlinked ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight-tenths of a point or more between 1990 and 2009, causing their rankings to slip.” Economic Freedom of the World Please see www.freetheworld.com for the official report Watch video: Koch Foundation-Economic freedom Economic Freedom and Income 2007 GDP Per Capita, PPP (in constant 2005 dollars) $32,443 $14,513 $6,783 $3,802 Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • Income per person in the freest quartile of countries was about eight times the figure for the least free. Economic Freedom and Growth Growth of GDP Per Capita 1990-2007 (Annual %) 2.3% 2.4% 2.1% 0.9% Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • Countries in the most free quartile grew at an annual rate of 2.4% compared to the 0.9% growth for the least-free quartile. Economic Freedom and Life Expectancy Years of Life Expectancy (at birth) 2007 59.4 Least-Free Quartile 66.7 Third Quartile 71.6 Second Quartile 79.1 Most-Free Quartile • People in the most economically free countries had almost 20 additional years of life compared to those in the least free economies of the world. Economic Freedom and Infant Mortality Rate Infant Mortality Rate (per 1000 live births) 2007 62.0 39.1 20.9 5.8 Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • The infant mortality rate in the least economically free countries was nearly 12 times greater than that of the most free economies. Economic Freedom and Access to Sanitary Water Share of Population with Access to Improved Water Source, 2006 89.5% 99.2% 16.A3 Table in word file 83.5% 74.2% Should fit in this space Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • Access to sanitary water increased with economic freedom. Economic Freedom and Environmental Quality Environmental Performance Index (2007/2008) 84.8 76.5 16.A3 Table in word file 71.6 64. Should fit in this space 5 Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • Studies have shown that the quality of the environment is strongly linked to income. Economic Freedom Income of Lowest 10% of Earners Average Income of Poorest 10%, 2007 $9,105 16.A3 Table in word file Should fit in this space $3,269 $896 Least-Free Quartile $1,744 Third Quartile Second Quartile Most-Free Quartile • In the nations of the top quartile, the average income of the poorest 10% was more than eight times that of the poorest 10% from countries in the bottom quartile. Economic Freedom and Political Corruption Corruption Perceptions Index, 2007 7.5 16.A3 Table in word file Should fit in this space 4.3 2.6 3. 2 Least-Free Quartile Third Quartile Second Quartile Most-Free Quartile • The incidence of political corruption was lower in the more free economies of the world. • These numbers are a reflection of the higher quality legal systems of the freer economies. With few exceptions, when an economy is more free the country will achieve: A higher growth rate A more equal distribution of income Better environmental quality Better health outcomes Higher standards of living Q17.2 On average, countries that have a larger degree of economic freedom tend to have 1. 2. 3. 4. higher per capita income levels but slower rates of economic growth than countries with less economic freedom. lower per capita income levels but more rapid rates of economic growth than countries with less economic freedom. both higher per capita income levels and more rapid growth rates than countries with less economic freedom. both lower income levels and slower growth rates than countries with less economic freedom. Question Answers: 17.1 = 4 17.2 = 3