Transcript E Ch 16 - Economic Growth (new window)

How do high tariffs and other
restraints on international trade affect
a nation's prosperity?
1. They increase employment and, thereby,
promote the growth of real GDP.
2. They prevent the nation from fully realizing the
potential gains from specialization, exchange,
and competition.
3. They protect domestic producers and, thereby,
promote economic growth.
4. Both a and c are correct.
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.
(I) Countries with more economic freedom
during the 1980s and 1990s had a lower
average per capita GDP.
(II) Countries with more economic freedom
during the 1980s and 1990s achieved higher
rates of economic growth.
1. Both I and II are true.
2. Both I and II are false.
3. I is true; II is false.
4. I is false; II is true.
Chapter 16 -- Economic Growth
and the wealth of nations
• Learning Objectives
• To understand the relationship between o/p and Y
(which causes which?)
Chapter 16 -- Economic Growth
and the wealth of nations
• Learning Objectives
• To understand the relationship between o/p and Y
(which causes which?)
• To identify general factors that determine economic
growth – Why is it that the US, only 200+ years old is
one of the wealthiest nations on earth, more so than
nations that have been around thousands of years?
Chapter 16 -- Economic Growth
and the wealth of nations
• Learning Objectives
• To understand the relationship between o/p and Y
(which causes which?)
• To identify general factors that determine economic
growth – Why is it that the US, only 200+ years old is
one of the wealthiest nations on earth, more so than
nations that have been around thousands of years?
• To identify specific institutional factors that determine
economic growth (rules of the game)
Chapter 16 -- Economic Growth
and the wealth of nations
• Learning Objectives
• To understand the relationship between o/p and Y
(which causes which?)
• To identify general factors that determine economic
growth – Why is it that the US, only 200+ years old is
one of the wealthiest nations on earth, more so than
nations that have been around thousands of years?
• To identify specific institutional factors that determine
economic growth (rules of the game)
• To apply the factors of growth to economies
around the world
CW 16.1
1. Find out if a nation is rich or poor.
2. Use the information provided to
rank each nation (A-D) from 1 to 4
with 1 being the richest and 4 the
poorest.
3. Can you predict the name of the
nation?
Rank these 4 countries, richest to poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
_________________________________________________________
Rank these 4 countries, richest to poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
_________________________________________________________
Rank these 4 countries, richest to poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
_________________________________________________________
Country C --
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
Rank these 4 countries, richest to poorest:
Country A --
Country B --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Size: About the size of California
Pop: 127 million +
Natural resources: few; fish
_________________________________________________________
Country C --
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
Results:
Country D --
Size: 3.5 times bigger than Wash, DC
Pop: 4 million
Natural Resources: not many, fish,
deep water port
Rank these 4 countries, richest to poorest:
Country A --
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %
Country B --
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
GDP/capita = $13,600
life expectancy = 76.9 yrs
literacy rate = 97.1 %
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $30,400
life expectancy = 81.15 yrs
literacy rate = 99%
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C --
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%
Country D --
Size: 3.5 times bigger than Wash, DC
Pop: 4 million
Natural Resources: not many
deep water port
Rank these 4 countries, richest to poorest:
Country A -- Argentina
Size: 3/10 size of US
Population: 40 Million
Natural resources: many,
Fertile land, lead, zinc, tin, etc.
Country B -- Japan
Size: About the size of California
Pop: 127 million
Natural resources: few; fish
GDP/capita = $13,600
GDP/capita = $30,400
life expectancy = 76.9 yrs
life expectancy = 81.15 yrs
literacy rate = 97.1 %
literacy rate = 99%
_________________________________________________________
Country C -- Russia
Country D -- Singapore
Size: 1.8 times the size of US (land mass)
Pop: 143 million
Natural Resources: tons! Oil, natural
Gas, coal, timber (vast supplies)
Size: 3.5 times bigger than Wash, DC
Pop: 4 million
Natural Resources: not many
GDP/capita = $10,700
life expectancy = 67.1 yrs
literacy rate = 99.6%
GDP/capita = $29,700
life expectancy = 81.62 yrs
literacy rate = 92.5%
Bonus Nation
• Size: Twice the size of CA
• Population: very large, 130 million +
• Natural Resources: vast: oil, tin, iron ore,
coal, limestone, lead, zinc, natural gas
Bonus Nation
• Size: Twice the size of CA
• Population: very large, 130 million +
• Natural Resources: vast: oil, tin, iron ore,
coal, limestone, lead, zinc, natural gas
Nigeria:
• Per capital GDP: $1,400 2005
• Life Expectancy: 47.08 yrs
• Infant Mortality: 97.14 / 1000
How can this be?
• Natural resources have contributed
to the economic success of some
nations.
• Yet, many nations with vast stocks of
natural resources are poor.
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
1. More Choice -- Output growth means more goods and
services per person….that increases our standard of living
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
1. More Choice -- Output growth means more goods and
services per person….that increases our standard of living
2. Income Growth – Output growth leads to
income growth.
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
1. More Choice -- Output growth means more goods and
services per person….that increases our standard of living
2. Income Growth – Output growth leads to
income growth.
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
1. More Choice -- Output growth means more goods and
services per person….that increases our standard of living
2. Income Growth – Output growth leads to
income growth.
3. Stable Growth -- yields better decisions
2 major issues in macro Economics:
• Economic Growth
• Short run fluctuations (Business cycle)
What is the importance of Economic Growth?
1. More Choice -- Output growth means more goods and
services per person….that increases our standard of living
2. Income Growth – Output growth leads to
income growth.
3. Stable Growth -- yields better decisions
4. Increased Employment --
Are these all good things? Look at the opposite….
1. Unemployment
2. PPC shrinks – negative growth
3. Income decreases, leads to MORE unemployment
Are these all good things? Look at the opposite….
1. Unemployment
2. PPC shrinks – negative growth
3. Income decreases, leads to MORE unemployment
Conclusion: We ALWAYS want increases in our Growth
Rate, NOT Decreases
PLUS: Command Systems of Gov’t
are hazardous to your health:
Command Systems of Gov’t are
hazardous to your health:
The Wall Street Journal (2007) reports:
• Mao Zedong was responsible for 70 million
peacetime deaths.
• Stalin killed about 40 million in the Soviet
Union (middle estimate).
• Pol Pot and the Khmer Rouge killed 3
million Cambodians - - more than 1/3 of
the population between 1975-1979.
Video – which societies succeed
and which ones fail?
Notice institutions
But first….PRS
Which of the following is the
most important to economic
growth?
1. Socialism
2. Capitalism
3. Liberty
4. Democracy
Which of the following is the
most important to economic
growth?
1. Socialism
2. Capitalism
3. Liberty
4. Democracy
KEY:
• Nothing matters as much as liberty…
Which of the following will be most
likely to contribute to the growth of a
less-developed country?
1. price controls that keep the cost of
agricultural products low
2. rapid population growth
3. exchange rate controls and export
restrictions
4. secure property rights and low
marginal tax rates
Which of the following would be most likely
to help the residents of a nation produce a
larger output and consume a wide variety of
products at economical prices?
1. imposition of tariffs on imported goods
2. quotas that protect domestic businesses
against foreign producers that pay
workers low wages
3. free trade
4. exchange rate controls
Which of the following is true?
1. Nations achieve high rates of economic growth
primarily because of their natural resource
endowments.
2. Human and physical capital investments are largely
irrelevant to economic growth.
3. Poor nations grow slowly because they do not have
access to modern technology.
4. A favorable institutional environment will tend to
attract more investment in human and physical
capital.
How do high tariffs and other
restraints on international trade affect
a nation's prosperity?
1. They increase employment and, thereby,
promote the growth of real GDP.
2. They prevent the nation from fully realizing the
potential gains from specialization, exchange,
and competition.
3. They protect domestic producers and, thereby,
promote economic growth.
4. Both a and c are correct.
KEY:
• Nothing matters as much as liberty…
• U.S. sets up their rules such that we are
pretty much free to run our businesses as
we see fit.
Where are the lights of North Korea?
http://www.globalsecurity.org/military/world/dprk/dprk-dark.htm
What Institutions and Policies
will promote growth?
• Secure Property rights & political stability -- some
countries have no ownership rights. Government
can take it away on a whim.
What Institutions and Policies
will promote growth?
• Secure Property rights & political stability -- some
countries have no ownership rights. Government
can take it away on a whim.
• Competitive Markets (not bribing local politicians)
What Institutions and Policies
will promote growth?
• Secure Property rights & political stability -- some
countries have no ownership rights. Government
can take it away on a whim.
• Competitive Markets (not bribing local politicians)
• Free Trade – for the most part, the US can import
and export at will
What Institutions and Policies
will promote growth?
• Secure Property rights & political stability -- some
countries have no ownership rights. Government
can take it away on a whim.
• Competitive Markets (not bribing local politicians)
• Free Trade – for the most part, the US can import
and export at will
• Open Capital Markets – (financial assets),
can get business loans relatively easily
What Institutions and Policies
will promote growth?
• Secure Property rights & political stability -- some
countries have no ownership rights. Government
can take it away on a whim.
• Competitive Markets (not bribing local politicians)
• Free Trade – for the most part, the US can import
and export at will
• Open Capital Markets – (financial assets),
can get business loans relatively easily
• Stable money & prices – Fed has done great job,
US currency has become the world’s currency
Start here 9:30 am
Thursday Feb. 21st
What Institutions and Policies
will promote growth?
• Relatively low marginal tax rates – Laffer
Curve shows us how a decrease in MTR
(from high levels) leads to increases in
productivity, increases in PPC
What is the role of Government in economic progress?
Organization for Economic Co-operation and Development
Measures government involvement in the economy.
Conclusions?
• LESS government involvement = more growth
Conclusions?
• LESS government involvement = more growth
• MORE government involvement = decrease in
growth rate
Conclusions?
• LESS government involvement = more growth
• MORE government involvement = decrease in
•
growth rate
Government involvement in the economy is
important (don’t want anarchy) but too MUCH
involvement can harm growth.
Conclusions?
• LESS government involvement = more growth
• MORE government involvement = decrease in
•
•
growth rate
Government involvement in the economy is
important (don’t want anarchy) but too MUCH
involvement can harm growth.
0 % gov. = bad
We need judicial system,
property rights, rules
Conclusions?
• LESS government involvement = more growth
• MORE government involvement = decrease in
•
•
•
growth rate
Government involvement in the economy is
important (don’t want anarchy) but too MUCH
involvement can harm growth.
0 % gov. = bad
We need judicial system,
property rights, rules
100% gov. = bad ex. Mom’s involvement in
your college life…
Economic theory indicates that
the size of government will be:
1. Positively related to economic growth at small levels of
2.
3.
4.
government but negatively related to economic growth
at large levels of government
Positively related to economic growth at all possible
sizes of government
Negatively related to economic growth at all possible
sizes of government
Unrelated to economic growth.
Take a look at the next slide…
Conclusions:
the more free an economy is, the higher
the growth rate will be (within ranges).
The higher the
index no., the more
free the economy
P. 362, text
exhibit 6 from text, p. 360
If the political leaders of a country want to promote
economic growth, which of the following policy
alternatives will be the most effective?
1. Expansionary monetary policy designed to keep
interest rates low
2. Public sector investment programs financed by high
progressive taxes
3. Low taxes, money supply consistent with long run
price stability, abolition of price controls and trade
restrictions
4. Institute price controls in the agricultural market to
keep prices low and to get rid of surpluses
According to your text, the highest rates of
economic growth in recent decades have
been achieved by:
1. Countries with the most rapid growth of
government expenditures as a percent of GDP
2. Countries with the smallest government
expenditures as a share of GDP
3. Countries with the largest government
expenditures as a share of GDP
4. Western European Countries
Video: Did you know?
End of Ch. 16