How do high tariffs and other restraints on international trade affect a nation's prosperity? They increase employment and, thereby, promote the growth of real GDP. They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition. They protect domestic producers and, thereby, promote economic growth. Both a and c are correct.

Economic theory indicates that the size of government will be unrelated to economic growth. negatively related to economic growth at all possible sizes of government. positively related to economic growth at all possible sizes of government. positively related to economic growth at small levels of government but is negatively related to economic growth at large levels of government.

Both I and II are true. Both I and II are false. (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. Both I and II are true. Both I and II are false. I is true; II is false. 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 Find out if a nation is rich or poor. Use the information provided to rank each nation (A-D) from 1 to 4 with 1 being the richest and 4 the poorest. 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 -- Country B -- Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. _________________________________________________________

Rank these 4 countries, richest to poorest: Country A -- Country B -- Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. _________________________________________________________ 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 Size: About the size of California Population: 40 Million Pop: 127 million + Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. _________________________________________________________ Country C -- Country D -- Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger than Wash, DC Pop: 143 million Pop: 4 million Natural Resources: tons! Oil, natural Natural Resources: not many, fish, Gas, coal, timber (vast supplies) deep water port Results:

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 Country B -- Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish 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 Country B -- Japan Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. 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%

Rank these 4 countries, richest to poorest: Country A -- Argentina Country B -- Japan Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. 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 Country B -- Japan Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. 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 Country B -- Japan Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. 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 -- Size: 1.8 times the size of US (land mass) Size: 3.5 times bigger than Wash, DC Pop: 143 million Pop: 4 million Natural Resources: tons! Oil, natural Natural Resources: not many Gas, coal, timber (vast supplies) deep water port GDP/capita = $10,700 life expectancy = 67.1 yrs literacy rate = 99.6%

Rank these 4 countries, richest to poorest: Country A -- Argentina Country B -- Japan Size: 3/10 size of US Size: About the size of California Population: 40 Million Pop: 127 million Natural resources: many, Natural resources: few; fish Fertile land, lead, zinc, tin, etc. 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) Size: 3.5 times bigger than Wash, DC Pop: 143 million Pop: 4 million Natural Resources: tons! Oil, natural Natural Resources: not many Gas, coal, timber (vast supplies) GDP/capita = $10,700 GDP/capita = $29,700 life expectancy = 67.1 yrs life expectancy = 81.62 yrs literacy rate = 99.6% 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 Nigeria: 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? 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? 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? 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? 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? 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…. Unemployment PPC shrinks – negative growth Income decreases, leads to MORE unemployment

PLUS: Command Systems of Gov’t are hazardous to your health: Are these all good things? Look at the opposite…. Unemployment PPC shrinks – negative growth 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 Video – which societies succeed and which ones fail? Notice institutions But first….PRS

Which of the following is the most important to economic growth? Socialism Capitalism Liberty Democracy

Which of the following is the most important to economic growth? Socialism Capitalism Liberty 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? price controls that keep the cost of agricultural products low rapid population growth exchange rate controls and export restrictions secure property rights and low marginal tax rates

imposition of tariffs on imported goods 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? imposition of tariffs on imported goods quotas that protect domestic businesses against foreign producers that pay workers low wages free trade exchange rate controls

Which of the following is true? Nations achieve high rates of economic growth primarily because of their natural resource endowments. Human and physical capital investments are largely irrelevant to economic growth. Poor nations grow slowly because they do not have access to modern technology. 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? They increase employment and, thereby, promote the growth of real GDP. They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition. They protect domestic producers and, thereby, promote economic growth. Both a and c are correct. 43

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: Positively related to economic growth at small levels of 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? Expansionary monetary policy designed to keep interest rates low Public sector investment programs financed by high progressive taxes Low taxes, money supply consistent with long run price stability, abolition of price controls and trade restrictions 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: Countries with the most rapid growth of government expenditures as a percent of GDP Countries with the smallest government expenditures as a share of GDP Countries with the largest government expenditures as a share of GDP Western European Countries

Video: Did you know?

End of Ch. 16