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.
Chapter 16 Objectives
Work week: 50 – 70+ hours High infant mortality rates Life expectancy: 25 – 35 years Income per person (in 1990 dollars): $650
Before 1820
Country can produce more As GDP per capita rises
◦ Better air and water◦ More leisure◦ Longer lifespans◦ Improved diet◦ Better quality of life
Why Economic Growth Matters
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
Economic Growth is Important
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
Why are some countries rich and other countries poor?
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
Gains from Trade
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
Entrepreneurship and Technology
Physical capital – machines Human capital – knowledge and skills
Investment in Physical and Human Capital
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
Institutional Environment
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
The Institutional Environment
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
The Institutional Enviornment
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
Other Factors May Impact Growth
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
Other Factors May Impact Growth