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Transcript
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.