Creating an Environment for Growth and Prosperity

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.

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

Do robots and machines steal jobs from people or reduce employment?

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

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