The Wealth of Nations and Economic Growth Outline Key Facts About the Wealth of Nations and Economic Growth Understanding the Wealth of Nations Incentives and Institutions What Happened in Argentina Not in Book Health and Wealth Wealth of Nations and 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 What is the historical distribution of wealt h GDP per Capita Varies Everyone Used to be Poor A Primer on Growth Rates How is economic growth measured yt yt 1 gt 100 yt 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 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 The Rule of 70 As the table shows small changes in the growth rate large changes over time Growth Miracles and 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 Growth Miracles and Disasters Quick Summary 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 Understanding Wealth of Nations Understanding 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 Video Technological knowledge knowledge about how the world works that is used to produce goods and services Tension between technology and labor 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 North and South Korea 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 Institutions of 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 Institutions of 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 Institutions of Growth Honest Government Political Stability 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 Institutions of 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 Institutions of 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 Institutions of 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 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 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 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 What happened to Argentina In early 20th century poised to become the United States of South America After 1930 experienced a stunning reversal Why Also a good introduction to later concepts in the course Argentina in the 19th Century Not very impressive in the first half of the 19th century Civil wars and instability dominated Once the wars stopped able to solidify property laws Lead to large inflows of capital and labor Overall economy stabilized from 1860 80 Impressive Growth Main cause Export of agricultural goods especially wheat Up to 1875 Argentina imported wheat By early 1900s produced enough for domestic use as well as exported over 75 million bushels of wheat Commensurate rise in GDP per capita GDP per capita in 1880 was 35 of US GDP per capita By 1905 it was 80 Impressive Growth Attracted tons of investment from abroad Funded
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