Transcript Macro Chapter 16

Macro Chapter 17
Institutions, Policies, and CrossCountry Differences in Income
and Growth
2 Learning Goals
1) Explain how economic freedom and
growth are related
2) Identify the benefits of economic freedom
How Large Are the
Income Differences
Across Countries?
How Do Growth Rates
Vary across Countries?
Why?
2 major reasons:
1) Institutions (see Chapter 16)
2) Economic Freedom
Economic Freedom as a
Measure of Sound
Institutions
Combine with next section
Institutions, Policies, and
Economic Performance
Economic Freedom
Method of organizing economy with the
following characteristics:
1) Personal choice
2) Market-based voluntary exchange
3) Competitive entry into markets
4) Private property
Main point: the government’s policies and
involvement in the economy are important,
but too much government intervention can
harm growth
Q17.1 Economic theory indicates that the size of
government will be
1. unrelated to economic growth.
2. negatively related to economic growth at all
possible sizes of government.
3. positively related to economic growth at all
possible sizes of government.
4. positively related to economic growth at small
levels of government but is negatively related
to economic growth at large levels of
government.
Major Conclusion:
The more free the economy is, the higher
the growth rate will be
The 2012 EFW report reveals the US is now
in 18th place with a rating of 7.69
“The United States, long considered the standard bearer for
economic freedom among large industrial nations, has
experienced a substantial decline in economic freedom
during the past decade. From 1980 to 2000, the United
States was generally rated the third freest economy in the
world, ranking behind only Hong Kong and Singapore. After
increasing steadily during the period from 1980 to 2000, the
chainlinked EFW rating of the United States fell from 8.65 in
2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked
ranking of the United States has fallen precipitously from
second in 2000 to eighth in 2005 and 18th in 2010.”
Economic Freedom of the World
See www.freetheworld.com
Watch video: Economic Freedom-Part 1
Economic Freedom and Income
2009 GDP Per Capita, PPP
(in constant 2005 dollars)
•The real per-person income
(using a PPP adjustment) for
countries ordered by economic
freedom rating is shown here
by quartiles.
•Note the strong positive
linkage. Income per person in
the freest quartile of countries
was about eight times the
figure for the least free.
$35,501
$14,961
$4,545
Least-Free
Quartile
$6,464
Third
Quartile
Second
Quartile
Most-Free
Quartile
Economic Freedom and Growth
Growth of GDP Per Capita 1990-2009
(Annual %)
•The relationship between the
economic freedom of a country
and its growth rate (of GDP per
capita) during the 1990-2007
period is shown here.
•Countries in the most free
quartile grew at an annual rate
of 3.1% compared to the 1.2%
growth for the least-free
quartile.
3.1%
2.3%
2.4%
Third
Quartile
Second
Quartile
1.2%
Least-Free
Quartile
Most-Free
Quartile
Economic Freedom and Poverty
•The extreme poverty rate
in the most free quartile
of countries was 2.7%
compared to 41.5% in
the least free quartile.
•The pattern in the data
for the moderate poverty
rate is the same.
Extreme Poverty Rate
Moderate Poverty Rate
(2000-2005)
(2000-2005)
41.5%
57.4%
36.3%
21.3%
14.0%
7.8%
3.6%
2.7%
•Clearly the countries with
more economic freedom
have lower poverty rates.
Least-Free Third
Quartile Quartile
Second Most-Free
Quartile Quartile
Least-Free Third
Quartile Quartile
Second Most-Free
Quartile Quartile
Economic Freedom and Life Expectancy
Years of Life Expectancy
(at birth) 2007
59.4
Least-Free
Quartile
66.7
Third
Quartile
71.6
Second
Quartile
79.1
Most-Free
Quartile
• People in the most economically free countries
had almost 20 additional years of life compared
to those in the least free economies of the world.
Economic Freedom
and Infant Mortality Rate
Infant Mortality Rate
(per 1000 live births) 2007
62.0
39.1
20.9
5.8
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
• The infant mortality rate in the least economically
free countries was nearly 12 times greater than
that of the most free economies.
Economic Freedom
and Access to Sanitary Water
Share of Population with Access
to Improved Water Source, 2006
89.5%
99.2%
16.A3 Table
in word file
83.5%
74.2%
Should fit in this space
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
• Access to sanitary water increased with economic
freedom.
Economic Freedom
and Environmental Quality
Environmental Performance Index
(2007/2008)
84.8
76.5
16.A3 Table
in word file
71.6
64.
Should fit in this space
5
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
• Studies have shown that the quality of the
environment is strongly linked to income.
Economic Freedom Income of Lowest
10% of Earners
Average Income of Poorest 10%, 2007
$9,105
16.A3 Table in word file
Should fit in this space
$3,269
$896
Least-Free
Quartile
$1,744
Third
Quartile
Second
Quartile
Most-Free
Quartile
• In the nations of the top quartile, the average
income of the poorest 10% was more than eight
times that of the poorest 10% from countries in
the bottom quartile.
Economic Freedom
and Political Corruption
Corruption Perceptions Index, 2007
7.5
16.A3 Table in word file
Should fit in this space 4.3
2.6
3.
2
Least-Free
Quartile
Third
Quartile
Second
Quartile
Most-Free
Quartile
• The incidence of political corruption was lower in
the more free economies of the world.
• These numbers are a reflection of the higher
quality legal systems of the freer economies.
With few exceptions, when an economy
is more free the country will achieve:
A higher growth rate
A more equal distribution of income
Better environmental quality
Better health outcomes
Higher standards of living
Watch video: Economic Freedom-Part 2
Q17.2 On average, countries that have a larger
degree of economic freedom tend to have
1.
2.
3.
4.
higher per capita income levels but slower rates of
economic growth than countries with less economic
freedom.
lower per capita income levels but more rapid rates of
economic growth than countries with less economic
freedom.
both higher per capita income levels and more rapid growth
rates than countries with less economic freedom.
both lower income levels and slower growth rates than
countries with less economic freedom.
Question Answers
17.1 = 4
17.2 = 3