Transcript Chapter7 power point

Chapter 7
The Wealth of Nations
and Economic
Growth
Second Edition
Chapter Outline
 Key Facts About the Wealth of Nations
and Economic Growth
 Understanding the Wealth of Nations
 Incentives and Institutions
 Appendix: The Magic of Compound
Growth Using a Spreadsheet.
2
Introduction
 Every year 1.8 million children die from
diarrhea.
 Preventing these deaths requires only one
thing: economic growth.
 Health and wealth go together.
• The next figure shows that the higher the GDP
per capita the greater is the survival rate of
newborns.
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Introduction
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Introduction
 Wealth is clearly important. This leads us
to ask three questions:
•
•
•
Why are some nations wealthy while others
are poor?
Why are some nations getting wealthier
faster than others?
Can anything be done to help poor nations
become wealthy?
 In this chapter and the next, we will try to
answer some of these questions.
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Wealth of Nations and Economic Growth
 Three Key Facts
1. GDP per Capita Today Varies Enormously
among Nations
2. Everyone Used to Be Poor
3. There are Growth Miracles and Growth
Disasters
 Let’s look at each of these in turn.
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GDP Per Capita Varies Among Nations
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Everyone Used to Be Poor
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A Primer on Growth Rates
How is economic growth measured?
y t  y t 1
gt 
 100
y t 1
Example:
Year
2008
2009
g2009
real GDP per capita
$15,000 billion
$15,500 billion
15,500  15,000

 100  3.3%
15,000
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The Rule of 70
 The time it takes a quantity to double
70
Doubling time 
growth rate in %
• Example: If real GDP per capita is growing at
an annual growth rate of 3.5%, it will double in:
70
 20 years.
3 .5
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The Rule of 70
As the table shows, small changes in the
growth rate → large changes over time.
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Growth Miracles and Growth Disasters
 Two Growth Miracles
• Japan: annual rate of real growth1950-70 = 8.5%
• South Korea: annual rate of real growth1950-70 =
7.2%
 Two Growth Disasters
• Argentina
 1900: one of the richest countries in the world
 Now: per capita real GDP is 1/3 that of the U.S.
• Nigeria
 Has barely grown since 1950
 Poorer now than it was in 1974
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Growth Miracles and Growth Disasters
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Summarizing the Facts: Good and
Bad News
 Bad News
• Most of the world is poor.
• More than a billion people live on less than $2
a day.
 Good News
• Relatively recent economic growth (since
1900) dramatically raised the standard of living
of most people in developed nations.
• Korea was as poor as Nigeria 1950.
• There is no reason that currently poor
countries cannot achieve similar results.
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Check Yourself
 According to Figure 7.2 (Slide 6) , approximately
what percentage of the world’s population
lived in China in 2000?
 If you earn 5% on your savings in a bank
account, how many years will it take for your
savings to double? How about if you make
8%?
 In figure 7.4, (slide 12) when did Japan’s real
GDP per capita cross the $10,000 barrier?
What was Japan’s growth rate in that time
span?
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Understanding the Wealth of Nations
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Understanding the Wealth of Nations
 The Factors of Production
• Physical capital: the stock of tools, structures,
and equipment.
• Human capital: is the productive knowledge
and skills that workers acquire through
education, training and experience.
• Technological knowledge: knowledge about
how the world works that is used to produce
goods and services.
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Incentives and Institutions
 The amount of available resources only
tells part of the story.
• Why do some countries have more physical
and human capital and use more advanced
technology?
• Why do some countries obtain greater output
from the resources they have than others?
• The answers lie in the institutions and
incentives that countries adopt.
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Check Yourself
 Which country has more physical capital
per worker: the United States or China?
China or Nigeria?
 What are the three primary factors of
production?
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Incentives and Institutions
 A natural experiment: North and South
Korea
• Same people and culture.
• Similar levels of physical capital and access to
the same technology.
• North Korea became a communist state with a
centrally planned economy.
• South Korea adopted the capitalist free market
model.
 The result 50 years later
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North and South Korea at Night
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Incentives and Institutions
 Institutions - the “rules of the game” that
structure economic incentives.
 Institutions of Economic Growth
1. Property rights
2. Honest government
3. Political stability
4. A dependable legal system
5. Competitive and open markets
We will now look at each of these in turn.
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Institutions of Economic Growth
 Property rights - the right to benefit from
one’s effort.
• Provide incentives to work hard.
• Encourage investment in physical and human
capital.
• Encourage technological innovation.
 Without property rights:
• Effort is divorced from reward
• Free riders become a problem
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The Xiaogang Revolution
 Denied property rights farmers agreed
secretly to divide communal land and
assign it to individuals.
 They could keep all they produced over
the quota assigned by the government.
 Result: Xiaogang became a model for the
rest of China.
 The agreement was signed in blood.
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The Xiaogang Revolution
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Institutions of Economic Growth
 Honest Government
• Property rights are meaningless unless
government guarantees property rights.
• Corruption bleeds resources away from
productive entrepreneurs.
• Corruption takes resources away from more
productive government activity.
• Next is a list of the 10 most and the 10 least
corrupt countries. Are you surprised to see
who is or who isn’t on these lists?
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Honest Government: The Good and the Bad
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Honest Government
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Institutions of Economic Growth
 Political Stability – change of government
within the rule of law.
• Changing governments without the rule of law
results in uncertainty which leads to less
investment in physical and human capital.
• In many nations civil war, military dictatorship,
and anarchy have destroyed the institutions
necessary for economic growth.
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Political Instability
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Institutions of Economic Growth
 Dependable Legal System
• Facilitates contracts
• Protects property from others including
government.
 The legal system in some governments is so
poor that no one knows who owns what.
Example: In India, residents who purchase
land may have to do so more than once
because of lack of proper record keeping.
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Institutions of Economic Growth
 Competitive and Open Markets
• Encourage the efficient organization of
resources.
• About half the differences in per capita income
across countries is explained by a failure to
use capital efficiently.
• Example: One study found that if India used its
physical and human capital as efficiently as
the U.S., India would be four times richer than
it is today.
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Institutions of Economic Growth
 Why do poor countries use their capital
inefficiently?
• Inefficient and unnecessary regulations…
 Create monopolies
 Impede markets
• Example: until recently in India, it was illegal
to produce shirts using large-scale
production
• Expensive red tape increases time and cost
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Institutions and Growth Miracles
Revisited
 China changed from collective farming to
individual farming – Agricultural
productivity increased dramatically.
 America inherited a tendency toward a
market economy and democratic
institutions from England.
 America’s open frontier and freedom
encouraged new ideas and an
entrepreneurial spirit.
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Institutions and Growth Miracles
Revisited
 Industrial revolution
• Brought large scale production and important
innovations in transportation.
• Centered in Britain, developed a strong culture
of science and engineering.
• Brought the scientific method to bear on
economic production.
• Profits were invested in new ideas and
innovations so economic growth and
improvements in standards of living continued.
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Institutions and Growth Miracles
Revisited
• Economic growth would become more
common if more countries changed their
institutions.
• Where do institutions come from?
• Culture?
• History?
• Geography?
• Luck?
• How can they be changed?
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Check Yourself
 List the five institutions that promote
economic growth.
 In England during the Wars of the Roses
(late 1400s), two parties fought for the
crown. Contrast the prospects for
economic growth during this period and
after this period when Henry VII became
the unquestioned head of the country.
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Check Yourself
 When the pilgrims landed at Plymouth
Rock, they established a system of
collective farming in which all corn
production was shared. Given your
understanding of incentives, what do think
happened to the Pilgrims?
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Takeaway
 Economic growth has resulted in GDP per
capita today being 50 times higher in the rich
countries than in the poorest.
 Economic growth has lifted billions out of
near-starvation poverty but billions still
remain in dire poverty.
 Poor countries can catch up to the rich
countries in a surprisingly short period of
time.
 Accumulation of human and physical capital
is key but not sufficient.
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Takeaway
 Countries with institutions that encourage
the efficient use of human and physical
capital will succeed.
• These institutions are:
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Property rights
Honest Government
Political stability
Dependable legal system
Competitive and open markets.
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Second Edition
End of Chapter 7