Economic Growth and Development Chapter 20 Economic Growth and Development

Chapter Outline Growth in Already Developed Countries Comparing Developed Countries and Developing Countries Fostering (and Inhibiting) Development

Growth in Already Developed Countries Sources of Growth Increases in Aggregate Demand Increases in Aggregate Supply

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

Increasing Aggregate Demand AD RGDP PI AD’ PI’ RGDP’ PI* RGDP*

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 increase

Increases in Aggregate Supply AD RGDP PI AS’ PI* RGDP* PI’ RGDP’

Productivity and GDP Growth 1990-2004

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 inflation

Fostering (and Inhibiting) Development Solow growth model predicted convergence of income. Evidence shows this is not occurring. Political and institutional problems inhibiting growth.

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 Basics

Success Stories Japan China South Korea Saudi Arabia & Kuwait Solid financial institutions Education Few Resources China Resources Cheap labor South Korea Liberalized political institutions Saudi Arabia & Kuwait Oil

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 investors