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Chapter 16 Identify the general sources of economic growth. Identify specific institutional factors that promote economic growth. Comprehend why income levels and growth rates vary among countries. Work week: 50 – 70+ hours High infant mortality rates Life expectancy: 25 – 35 years Income per person (in 1990 dollars): $650 Country can produce more As GDP per capita rises ◦ ◦ ◦ ◦ ◦ Better air and water More leisure Longer lifespans Improved diet Better quality of life Rule of 70– if a variable grows at a rate of x percent per year, 70/x will approximate the years required for the variable to double GDP Growth Rate Years for GDP to Double 10% 7 7% 10 5% 14 2% 35 1% 70 Small changes in the growth rate of GDP have a big impact over time. Major sources of economic growth are ◦ ◦ ◦ ◦ Gains from trade Entrepreneurial discovery Investment in physical and human capital Favorable institutional environment Trade moves items from people who value them less to people who value them more Trade allows for ◦ Division of labor ◦ Specialization ◦ Mass production More trade means more output and growth Technological advancement and innovation allows us to produce more Entrepreneurs take risks ◦ Some ideas are made of win ◦ Many ideas fail The market ◦ Rewards good ideas ◦ Puts a stop to resource draining projects Do robots and machines steal jobs from people or reduce employment? Physical capital – machines Human capital – knowledge and skills Institutions — legal, regulatory, and social constraints that impact property rights and enforcement of contracts Government’s role is very important ◦ Encourage productive activities ◦ Discourage unproductive ones Legal system ◦ ◦ ◦ ◦ Secure property rights Rule of law Evenhanded enforcement of contracts Political stability Competitive markets ◦ Firms succeed by pleasing consumers ◦ Firms that do not are driven from the market Stable money and prices ◦ Low/no inflation ◦ Encourages investment Minimal regulation ◦ Regulations make starting a business difficult ◦ Regulations often have unintended consequences Avoidance of high tax rates ◦ High taxes reduce efficient use of resources ◦ High taxes increase underground activity and, labor force dropout Open international trade ◦ Avoid tariffs ◦ Avoid quotas 1. Population growth ◦ Thomas Malthus, the dismal scientist, 1798 ◦ People produce, not just consume 2. Natural resources ◦ Institutions more important than natural resources ◦ Natural resources do not guarantee growth Japan, Hong Kong, Singapore Nigeria, Venezuela, Russia 3. Foreign aid ◦ Agricultural and monetary donations ◦ Aid can have unintended consequences Politically distributed Disrupt markets 4. Climate and location ◦ Far from major markets, tropical climate ◦ Institutions more important than location Identify the general sources of economic growth. Identify specific institutional factors that promote economic growth. Comprehend why income levels and growth rates vary among countries.