Chapter 16

 Identify the general sources of economic growth.  Identify specific institutional factors that promote economic growth.  Comprehend why income levels and growth rates vary among countries.

 Work week: 50 – 70+ hours  High infant mortality rates  Life expectancy: 25 – 35 years  Income per person (in 1990 dollars): $650

 Country can produce more  As GDP per capita rises ◦ Better air and water ◦ More leisure ◦ Longer lifespans ◦ Improved diet ◦ Better quality of life

 Rule of 70– if a variable grows at a rate of x percent per year, 70/x will approximate the years required for the variable to double GDP Growth Rate Years for GDP to Double 10%7 7%10 5%14 2%35 1%70 Small changes in the growth rate of GDP have a big impact over time.

 Major sources of economic growth are ◦ Gains from trade ◦ Entrepreneurial discovery ◦ Investment in physical and human capital ◦ Favorable institutional environment

 Trade moves items from people who value them less to people who value them more  Trade allows for ◦ Division of labor ◦ Specialization ◦ Mass production  More trade means more output and growth

 Technological advancement and innovation allows us to produce more  Entrepreneurs take risks ◦ Some ideas are made of win ◦ Many ideas fail  The market ◦ Rewards good ideas ◦ Puts a stop to resource draining projects

Do robots and machines steal jobs from people or reduce employment?

 Physical capital – machines  Human capital – knowledge and skills

 Institutions — legal, regulatory, and social constraints that impact property rights and enforcement of contracts  Government’s role is very important ◦ Encourage productive activities ◦ Discourage unproductive ones

 Legal system ◦ Secure property rights ◦ Rule of law ◦ Evenhanded enforcement of contracts ◦ Political stability  Competitive markets ◦ Firms succeed by pleasing consumers ◦ Firms that do not are driven from the market  Stable money and prices ◦ Low/no inflation ◦ Encourages investment

 Minimal regulation ◦ Regulations make starting a business difficult ◦ Regulations often have unintended consequences  Avoidance of high tax rates ◦ High taxes reduce efficient use of resources ◦ High taxes increase underground activity and, labor force dropout  Open international trade ◦ Avoid tariffs ◦ Avoid quotas

1. Population growth ◦ Thomas Malthus, the dismal scientist, 1798 ◦ People produce, not just consume 2. Natural resources ◦ Institutions more important than natural resources ◦ Natural resources do not guarantee growth  Japan, Hong Kong, Singapore  Nigeria, Venezuela, Russia

3. Foreign aid ◦ Agricultural and monetary donations ◦ Aid can have unintended consequences  Politically distributed  Disrupt markets 4. Climate and location ◦ Far from major markets, tropical climate ◦ Institutions more important than location

 Identify the general sources of economic growth.  Identify specific institutional factors that promote economic growth.  Comprehend why income levels and growth rates vary among countries.