The Phases of the The Phases of the EconomyEconomy

According to economist W.W. Rostow, According to economist W.W. Rostow, technology has always been the driving technology has always been the driving force for economic growth force for economic growth

Economic growth has always been the Economic growth has always been the defining characteristic of modern industrial defining characteristic of modern industrial societiessocieties

With the invention of the locomotive and With the invention of the locomotive and steamship, manufacturers were able to steamship, manufacturers were able to more easily access natural resources which more easily access natural resources which resulted in the shift from handicrafts to resulted in the shift from handicrafts to mass productionmass production

W.W. Rostow’s modernization theory W.W. Rostow’s modernization theory divides a nation’s history of economic divides a nation’s history of economic growth into five stages which look at a growth into five stages which look at a nation’s society and economy.nation’s society and economy.

Stage 1: The Traditional Stage 1: The Traditional SocietySociety

Large agricultural sector and very limited Large agricultural sector and very limited manufacturing productionmanufacturing production

The way things were done in the past The way things were done in the past controls how things are done in the controls how things are done in the present present

Resistance to technology simply because Resistance to technology simply because it is newit is new

Life centers around family with strong Life centers around family with strong attachments to spiritual life (church) attachments to spiritual life (church)

Examples: Europe in the Middle Ages; many Examples: Europe in the Middle Ages; many LDC’s LDC’s today today

Stage 2: Preconditions for Stage 2: Preconditions for TakeoffTakeoff

New ideas emerge that challenge long-New ideas emerge that challenge long-standing traditions standing traditions

Although radical, these ideas prepare the Although radical, these ideas prepare the people of the country for alternative people of the country for alternative means of production allowing for political means of production allowing for political reforms and a more effective central reforms and a more effective central government government

Examples: Europe during the Renaissance Examples: Europe during the Renaissance

Stage 3: TakeoffStage 3: Takeoff Tradition finally gives way to the new ways of Tradition finally gives way to the new ways of

doing thingsdoing things Food production becomes commercialized and Food production becomes commercialized and

more efficient more efficient in national income finances the development of in national income finances the development of

natural resources and industrial expansion is natural resources and industrial expansion is made possible by the growth of the labor force made possible by the growth of the labor force and new markets for consumer goodsand new markets for consumer goods

Great economic growth takes place but at the Great economic growth takes place but at the cost of familycost of family

Society as a whole becomes less religious and Society as a whole becomes less religious and more secular more secular

Examples: Great Britain around 1800 (Industrial Examples: Great Britain around 1800 (Industrial Revolution), US by 1820 and Canada Revolution), US by 1820 and Canada

between between 1890 and 1914 1890 and 1914

Stage 4: The Drive to Stage 4: The Drive to Technological MaturityTechnological Maturity

Sustained period of refinements to technology Sustained period of refinements to technology which leads to manufacturing production so which leads to manufacturing production so high it exceeds the capacity of the domestic high it exceeds the capacity of the domestic market resulting in international trademarket resulting in international trade

Widespread poverty is eliminated and society Widespread poverty is eliminated and society as a whole actively pursues higher living as a whole actively pursues higher living standardsstandards

Leisure time and people begin to question Leisure time and people begin to question the role industry plays in eroding traditional the role industry plays in eroding traditional and family values and family values

Examples: Great Britain in 1840, US in 1860 and Examples: Great Britain in 1840, US in 1860 and Canada between 1914 and 1950; Canada between 1914 and 1950;

more more recently Mexico and South recently Mexico and South KoreaKorea

Stage 5: High Mass Stage 5: High Mass ConsumptionConsumption

The population has become primarily The population has become primarily urbanurban

Living standards for the majority of the Living standards for the majority of the people are high, exceeding basic needspeople are high, exceeding basic needs

Mass production triggers mass Mass production triggers mass consumption; people are taught to “need” consumption; people are taught to “need” products products

Examples: US was first to enter this stage, Examples: US was first to enter this stage, followed by Canada and followed by Canada and

other other industrialized nations industrialized nations

Measuring the Wealth of Measuring the Wealth of Countries: GNPCountries: GNP

Organizations such as the World Bank use an Organizations such as the World Bank use an annual calculation called Gross National annual calculation called Gross National Product (GNP) to measure a country’s wealthProduct (GNP) to measure a country’s wealth

The GNP is the sum total of the country’s Gross The GNP is the sum total of the country’s Gross Domestic Product (GDP), or income earned Domestic Product (GDP), or income earned from all domestic goods and services, plus the from all domestic goods and services, plus the net income earned on foreign investmentsnet income earned on foreign investments

GNP= GDP+ net income on foreign investmentsGNP= GDP+ net income on foreign investments

Measuring the Wealth of Measuring the Wealth of Countries: GNP continued..Countries: GNP continued..

Usually, the GNP for a country is divided by Usually, the GNP for a country is divided by the country’s total population to provide a the country’s total population to provide a figure called GNP per capita, or for each figure called GNP per capita, or for each personperson

GNP per capita= GNP/country’s total populationGNP per capita= GNP/country’s total population

Some economists use per capita GNP to Some economists use per capita GNP to measure a country’s standard of living, or the measure a country’s standard of living, or the average degree of material comfort that a average degree of material comfort that a country’s people enjoycountry’s people enjoy

Per Capita GNP US$765 are LLDC’sPer Capita GNP US$765 are LLDC’s Per Capita GNP US$766-US$9385 are LDC’s Per Capita GNP US$766-US$9385 are LDC’s Per Capita GNP US$9386 are MDC’sPer Capita GNP US$9386 are MDC’s

Measuring the Health of Measuring the Health of Countries: The Human Countries: The Human

Development IndexDevelopment Index Some economists state that measuring a Some economists state that measuring a

country’s standard of living by per Capita country’s standard of living by per Capita GNP solely is misleading GNP solely is misleading

This is cause because the method ignores This is cause because the method ignores pockets of terrible poverty that exist in pockets of terrible poverty that exist in some MDC’s and the pockets of wealth that some MDC’s and the pockets of wealth that exist in many LDC’sexist in many LDC’s

Second, money should not be the only Second, money should not be the only criterion of a nation’s well being; social criterion of a nation’s well being; social factors such as education levels, life factors such as education levels, life expectancy, gender equality, and freedom expectancy, gender equality, and freedom from persecution applyfrom persecution apply

Measuring the Health of Measuring the Health of Countries: The Human Countries: The Human

Development Index Development Index continued…continued…

There have been a number of attempts to devise There have been a number of attempts to devise a more complete system of measuring a a more complete system of measuring a country’s standard of livingcountry’s standard of living

Today, the most common and authoritative Today, the most common and authoritative measurement of living standards is the United measurement of living standards is the United Nations Human Development IndexNations Human Development Index

Each year, the UN releases its Human Each year, the UN releases its Human Development Report, which includes a list that Development Report, which includes a list that ranks every country in the world according to ranks every country in the world according to three basic factors:three basic factors:

1) Longevity (life expectancy)1) Longevity (life expectancy) 2) Knowledge (literacy rates and educational 2) Knowledge (literacy rates and educational

attainment)attainment) 3) Income (GDP per capita)3) Income (GDP per capita)