Slide 1CHAPTER OUTLINEGrowth in Already Developed CountriesAggregate DemandIncreasing Aggregate DemandAggregate SupplyIncreases in Aggregate SupplyProductivity and GDP Growth 1990-2004Comparing Developed Countries and Developing CountriesFostering (and Inhibiting) DevelopmentThe Challenges Facing Developing CountriesSuccess StoriesWhat Works20-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 20Economic Growth and Development20-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Growth in Already Developed Countries•Comparing Developed Countries and Developing Countries•Fostering (and Inhibiting) Development20-3©2015 McGraw-Hill Education. All Rights Reserved Growth in Already Developed Countries•Sources of Growth•Increases in Aggregate Demand•Increases in Aggregate Supply20-4©2015 McGraw-Hill Education. All Rights Reserved Aggregate Demand•Variables to Shift Aggregate Demand•Low interest rates•Low taxes•High government spending•Government can not make this occur continuously. •Eventually, the Classical Range of the Aggregate Supply curve will be reached.20-5©2015 McGraw-Hill Education. All Rights Reserved Increasing Aggregate DemandAD’ASADRGDPPIPI*RGDP*PI’RGDP’20-6©2015 McGraw-Hill Education. All Rights Reserved Aggregate Supply•Variables that can shift Aggregate Supply•Wage and Input Costs•Productivity•Technology•Wage and Input costs can’t continuously decrease•Productivity and Technology can continually increase20-7©2015 McGraw-Hill Education. All Rights Reserved Increases in Aggregate SupplyASADRGDPPIPI*RGDP*AS’PI’RGDP’20-8©2015 McGraw-Hill Education. All Rights Reserved Productivity and GDP Growth1990-200420-9©2015 McGraw-Hill Education. All Rights Reserved Comparing Developed Countries and Developing Countries•Rich Countries•Are getting richer (faster GDP growth)•Have more evenly divided incomes (lower GINI coefficients)•GDP is produced by services, then industry (agriculture insignificant)•Lower Inflation•Poor Countries•Have lower GDP growth rates•Have highly uneven incomes•Agriculture is an important part of GDP•Have higher levels of inflation20-10©2015 McGraw-Hill Education. All Rights Reserved Fostering (and Inhibiting) Development•Solow growth model predicted convergence of income.•Evidence shows this is not occurring.•Political and institutional problems inhibiting growth20-11©2015 McGraw-Hill Education. All Rights Reserved The Challenges Facing Developing Countries•Low Rates of Basic Literacy•Lack of Infrastructure•Political Instability•Corruption•Lack of Independent Central Banking•Inability to Repatriate Profits•A Need to Focus on the Basics20-12©2015 McGraw-Hill Education. All Rights Reserved Success Stories•Japan•Solid financial institutions•Education•Few Resources•China•Resources•Cheap labor•South Korea•Liberalized political institutions•Solid financial insituttions•Saudi Arabia & Kuwait•Oil20-13©2015 McGraw-Hill Education. All Rights Reserved What Works•Basic Building Blocks•education, •a low or manageable level of government corruption, •a level of political and financial stability•Creates confidence among foreign
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