Ch 21 22 04 04 2012 Why Don t More Low Income Countries Experience Rapid Growth 1 Failure to Enforce the Rule of the Law o Property Rights The rights individuals or firms have to the exclusive use of property including the right to buy or sell it o Rule of law The ability of a government to enforce the laws of the country particularly with respect to protecting private property and enforcing contracts 2 Wars and Revolutions o Wars have made it impossible for countries such as Afghanistan Angola Ethiopia the Central African Republic and the Congo to accumulate capital or adopt new technologies Why Don t More Low Income Countries Experience Rapid Growth Poor Public Education and Health o Many low income countries have weak public school systems so many workers are unable to read and write o People who are sick work less and are less productive when they do work Low rates of saving and investment o The low savings rates in developing countries can contribute to a vicious cycle of poverty Problem in Russia they don t have a good banking system Africa s economic pulse is quickening Real GDP rose 4 9 percent a year from 2000 through 2008 more than twice its pace in the 1980 s and 90 s Africa s collective GDP at 1 6 trillion in 2008 is not equal to Brazil or Russia Telecommunications banking and retailing are flourishing Construction is booming Private investment inflows are surging Many of Africa s 50 plus and individual economics face serious challenges including poverty disease and high infant morality rate The purchase of building by a corporation of a facility in a foreign The purchase by an individual or a firm of stock or bonds issued in Foreign Direct Investment FDI country Foreign Portfolio Investment another country Globalization investment The process of countries becoming more open to foreign trade and CNBC Video Luring Foreign Investments The Kudlow Report Matthew Slaughter We ve lost 200 300 billion with direct investment People see problems in the U S Other governments see what we do and often retaliate It over simplifies In the Video o Foreign direct investment is very important to the U S o If you re not going to buy our stuff then we re not moving o In the last few years some foreign direct investment has o Foreign direct investment is necessary to keep up our our plant to the U S dried up standard of living The Fed Sets Monetary Policy Five Myths o By printing money the Fed will create runway inflation o The fed is endangering the economy by driving down the value of the dollar o By buying down Treasury debt the Fed is financing the deficit o The Fed is immune to politics o Bernanke knows what he s doing He was a professor that study the Great Depression And Then There is Fiscal Policy Video Keynesian Revolution The name given to the widespread acceptance during the 1930s and 1940 s of John Maynard Keynes s macroeconomics model Are Banks the Key Paul Krugman vs MMT the great debate Last week a maverick Australian economists Steve Keen argued that understanding banking is a key to understanding the economy In his MYT blog Princeton economist Pauk Jrugman says that idea is misplace Krugman argues that bank lending doesn t increase demand in the economy it just shifts around If I decide to cut back on my spending and stash the funds in a bank which lends them out to someone else this doesn t have to represent a net increase in demand Yes in some cases lending is associated with higher demand because resources are being transferred to people with a higher propensity to spend but Keen seems to be saying something else and I m not sure why A few hours and scores of blog comments later Krugman returns to the debate to accuse Keen and the Mikskyites of engaging in Krugman writes banking mainstream Ch 21 Crowding Out 04 04 2012 A decline in private expenditures as a result of an increase in government purchases Will the U S Economy Return to Stability Economists have offered several explanations of why the U S economy experienced a period of relative stability from 1950 2007 o The increasing importance of services and the declining importance of goods o The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed o Active federal government policies to stabilize the economy o The increased stability of the financial system Ch 22 04 04 2012 Industrial Revolution The application of mechanical power to the production of goods beginning in England around 1750 o Most economists accept the idea that economic growth is not likely to occur unless a country s government provides the necessary type of institutional framework Small Differences in Growth Rates Are Important In the long run small differences in economic growth rates result in big differences in living standards Why Do Growth Rates Matter Growth rates matter because an economy that grows too slowly fails to raise living standards A model that explains growth rates in real GDP per capita over the Economic Growth Model long run Labor Productivity The quantity of goods and services that can be produced by one workers or y one hour of work Technological Change quantity of inputs A change in the quantity output a firm can produce using a given Three Main Sources of Technological Change Better machinery and equipment Better means of organizing and managing production Increases in human capital Human Capital The accumulated knowledge and skills that workers acquire from education and training or from their life experiences Physical capital is subject to diminishing returns to capital That is adding to existing capital stock will increase labor productivity by smaller and smaller amounts Technological change helps economies avoid diminishing returns to capital New Growth Theory A model of long run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system Government policy can help increase the accumulation of knowledge capital Protecting intellectual property with patents and copyrights Subsidizing research and development Subsidizing education in 3 ways Patent The exclusive right to produce a product for a period of 20 years from the date the product is invented What Caused the Productivity Slowdown of 1973 1994 Measurement problems High oil prices Deterioration in the U S educational system Has the New Economy Increased Productivity Productivity growth in the U S increased