Download Macro Chapter 16

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?
15th
Cross-Country Differences in Income
edition
Gwartney-Stroup
Sobel-Macpherson
The 2011 Per Person Income Levels for high-, Middle-, and Low-Income Countries
(measured in 2005 PPP U.S. dollars)
High-Income Countries
Middle-Income Countries
Low-Income Countries
Singapore
Norway
Hong Kong
United States
Switzerland
Netherlands
Canada
Ireland
Australia
Germany
United Kingdom
Japan
Poland
Hungary
Chile
Russia
Malaysia
Botswana
Mexico
Venezuela
Brazil
South Africa
Peru
Thailand
China
Ukraine
Egypt
Bolivia
Indonesia
Philippines
India
Nigeria
Bangladesh
Uganda
Malawi
Niger
$53,591
46,971
44,640
42,486
39,385
37,118
35,715
35,439
34,853
34,573
32,809
30,660
$17,938
17,294
15,251
14,714
14,174
13,021
12,814
11,258
10,279
9,678
9,037
7,635
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$7,418
6,365
5,547
4,503
4,094
3,638
3,223
2,237
1,569
1,188
789
642
First page
Why?
How Do Growth Rates
Vary across Countries?
15th
edition
Economic Growth: 1990-2011
Gwartney-Stroup
Sobel-Macpherson
The Average Annual Growth Rate Per-Person GDP for High-Growth,
High-Income Industrial, and Low-Growth Countries (1990–2011)
High-Growth
China
Vietnam
India
Taiwan
Sri Lanka
Korea, Rep.
Panama
Dominican Republic
Chile
Poland
High-Income Industrial
9.5%
5.9%
4.8%
4.4%
4.3%
4.3%
4.0%
4.0%
3.8%
3.8%
Australia
Norway
The Netherlands
United Kingdom
Germany
United States
Canada
France
Japan
Italy
Low-Growth
1.8%
1.8%
1.7%
1.6%
1.4%
1.4%
1.4%
1.0%
0.7%
0.6%
Kyrgyz Repulic
-0.8%
Central African Republic -0.8%
Cote d’Ivoire
-0.9%
Madagascar
-0.9%
Ukraine
-1.1%
Georgia
-1.1%
Burundi
-1.2%
Tajikistan
-1.7%
Moldova
-2.0%
Congo, Dem. Rep.
-3.0%
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First page
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
Class Activity:
What conclusion can you draw from the
following exhibit?
Main point: the government’s policies and
involvement in the economy are important,
but too much government intervention can
harm growth
Analogy: Your mom’s involvement in your
education
Transmitter question next
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.
25%
25%
25%
25%
60
1
2
3
4
Major Conclusion:
The more free the economy is, the higher
the growth rate will be
Two Transmitter Questions next
Q17.2 According to the EFW rankings, the
U.S. is more free than Canada, Finland, and
Chile.
1. True
2. False
50%
1
50%
2
30
Q17.3 According to the EFW rankings, the
U.S. is ranked in the top 10.
1. True
2. False
50%
1
50%
2
30
The 2012 EFW report reveals the US is now
in 18th place with a rating of 7.69
“The United States, long considered the standard bearer for
economic freedom among large industrial nations, has
experienced a substantial decline in economic freedom
during the past decade. From 1980 to 2000, the United
States was generally rated the third freest economy in the
world, ranking behind only Hong Kong and Singapore. After
increasing steadily during the period from 1980 to 2000, the
chainlinked EFW rating of the United States fell from 8.65 in
2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked
ranking of the United States has fallen precipitously from
second in 2000 to eighth in 2005 and 18th in 2010.”
Economic Freedom of the World
Good News! The US is now in 12th place.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First page
Economic Freedom of the World
EFW
Video:
15th
edition
Economic Freedom and Income
•The real per-person
income (using a PPP
adjustment) for countries
ordered by economic
freedom rating is shown
here by quartiles.
•Note the strong positive
linkage. Income per
person in the freest
quartile of countries was
about seven times the
figure for the least free.
Gwartney-Stroup
Sobel-Macpherson
2010 GDP Per Capita, PPP
(in constant 2005 dollars)
$37,691
$16,957
$5,188
Least-Free
Quartile
$6,596
Third
Quartile
Second
Quartile
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Most-Free
Quartile
First page
15th
edition
Economic Freedom and Growth
•The relationship between
the economic freedom of a
country and its growth rate
(of GDP per capita) during
the 1990-2010 period is
shown here.
•Countries in the most free
quartile grew at an annual
rate of 3.6% compared to
the 1.6% growth for the
least-free quartile.
Gwartney-Stroup
Sobel-Macpherson
Growth of GDP Per Capita 1990-2010
(Annual %)
3.6%
2.4%
2.8%
1.6%
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
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First page
15th
edition
Economic Freedom and Poverty
•The extreme poverty
rate in the most free
quartile of countries
was 2.7% compared
to 41.5% in the least
free quartile.
•The pattern in the
data for the moderate
poverty rate is the
same.
•Clearly the countries
with more economic
freedom have lower
poverty rates.
Gwartney-Stroup
Sobel-Macpherson
Extreme Poverty Rate
Moderate Poverty Rate
(2000-2005)
(2000-2005)
41.5%
57.4%
36.3%
21.3%
14.0%
7.8%
3.6%
2.7%
Second Most-Free
Least-Free Third
Quartile
Quartile
Quartile
Quartile
Second Most-Free
Least-Free Third
Quartile
Quartile
Quartile
Quartile
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First page
Economic Freedom
and Private Investment
•Here countries are divided
into 3 groups, based upon
their average EFW rating
during 1980-2005.
•Investment is positively
linked to economic freedom.
•Private investment was
18.7% of GDP in the freest
group, while only 11.2% of
GDP for the least free group.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Economic Freedom & Private Investment
as a Share of GDP
(Groups are Average EFW Ratings for 1980-2005).
18.7%
15.6%
11.2%
< 5.0
5.0 – 7.0
> 7.0
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First page
Economic Freedom and the
Productivity of Private Investment
•The estimated impact of a
1 percentage point increase in
investment as a share of GDP
on annual growth rate during
1980-2005 is shown.
•In the most free group, a
1 percentage point increase in
private investment enhanced
long-term growth by 0.25%,
compared to 0.07% for the
least free group.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Change in Growth Rate Per
Percentage-Point Change in Investment
(1980 – 2005)
0.25%
0.16%
0.07%
EFW < 5
EFW 5-7
EFW > 7
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First page
Economic Freedom and Life Expectancy
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Years of Life Expectancy
(at birth) 2007
79.1
66.7
71.6
59.4
Least-Free
Quartile
Third
Quartile
Second
Quartile
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.
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First page
Economic Freedom
and Infant Mortality Rate
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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.
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First page
Economic Freedom
and Access to Sanitary Water
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Share of Population with Access
to Improved Water Source, 2006
16.A3 Table83.5%
in word file
89.5%
99.2%
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.
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First page
Economic Freedom
and Environmental Quality
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Environmental Performance Index
(2007/2008)
84.8
16.A3 Table71.6
in word file
76.5
64.5
Should fit in this space
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
• Studies have shown that the quality of the
environment is strongly linked to income.
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First page
Economic Freedom Income of Lowest
10% of Earners
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Average Income of Poorest 10%, 2007
$9,105
16.A3 Table in word file
Should fit in this space
$3,269
$1,744
$896
Least-Free
Quartile
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.
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First page
Economic Freedom
15th
edition
and Political Corruption
Gwartney-Stroup
Sobel-Macpherson
Corruption Perceptions Index, 2007
7.5
16.A3 Table in word file
Should fit in this space
2.6
Least-Free
Quartile
4.3
3.2
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.
Copyright ©2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.
First page
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
Video:
Transmitter question next
Q17.4 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.
25%
25%
25%
25%
60
1
2
3
4
2 Learning Goals
1) Explain how economic freedom and
growth are related
2) Identify the benefits of economic freedom