The Wealth of Nations and Economic Growth

Chapter 6

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C O W E N A N D TA B A R R O K

The world’s average (mean) GDP per capita is $9,133. There are roughly 6 billion people in the world. What is the world’s total GDP?

a)$55,000b)$55,000,000c)$55 billiond)$555 trillione)$55 trillion

Wealth of Nations

Institutions

• Why do poor countries use their capital inefficiently?

3

Try it!

4

What is the most proximate (or direct) cause of growth in real GDP per capita?a) the factors of productionb) political system in the economyc) institutionsd) incentives

Try it!

5

Human capital is the a) stock of tools including machines,

structures, and equipment.b) productive knowledge and skills

that workers acquire through education, training, and experience.

c) knowledge about how the world works that is used to produce goods and services.

d) organization skills of business owners.

Try it!

6

Which of the below is not directly related to human capital? a) a life-saving drugb) schoolingc) work experienced) an understanding of chemistry

Try it!

7

Why did so many Chinese farmers and workers starve under “The Great Leap Forward”?a) The number of workers on

communes was reduced.b) The Chinese people did not know

how to farm in certain geographic areas.

c) The incentive to work hard was low since the rewards were so minimal.

d) All of the answers are correct.

The Rule of 70 (The Magic of Compounding)

• The rule of 70:

– Example: If real GDP per capita is growing at an annual growth rate of 3.5%, it will double in:

– The moral? Small improvements in growth add up fast (the power of compounding).

8

% 70

time Doublinginrategrowth

years. 20 5.3

70

Appendix• The rule of 70 is handy, but using a

Microsoft Excel spreadsheet can help answer more difficult questions.

• Compound Growth: The Long Method

If the growth rate of Real GDP in the U.S. is 3%, how many years will it take to double?

a) approximately 12 yearsb) approximately 210 yearsc) approximately 23 yearsd) approximately 33 yearse) none of these

Rule of 70

Try it!

11

If China experiences a 10% annual growth rate in real GDP, compared to Germany which experiences a 2% annual growth rate, by how many years will China’s GDP double sooner than Germany’s?

a) 7 years soonerb) 28 years soonerc) 35 years soonerd) 4 years soonere) 10 years sooner

Rule of 70

Try it!

12

If a nation doubles its GDP per capita in 20 years, what is its annual growth rate?

a) 3.5% b) 4.2% c) 6.5% d) 7%e) 5%

Rule of 70

Appendix• The rule of 70 is handy, but using a

Microsoft Excel spreadsheet can help answer more difficult questions.

• Compound Growth: The Long Method

Appendix• Compound Growth: The Shortcut

If the growth rate is r percent and we grow for n years then:

nr

1001 ValueStarting ValueEnding

Appendix• Use Excel’s Goal Seek to work

backward to find, for example: number of years to reach a certain level of GDP.

– The ending value in cell B6 is fixed at 1,000,000. Excel then calculates the value of the variable in B2, that will give this result.

Appendix• The problem is solved

– Starting with $46,000 and growing at a rate of 2%, it will take a little over 150 years to reach $1,000,000.