Creating an Environment for Growth and Prosperity Chapter 16
Dec 23, 2015
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