The Phases of the Economy

According to economist W.W. Rostow, technology has always been the driving force for economic growth According to economist W.W. Rostow, technology has always been the driving force for economic growth Economic growth has always been the defining characteristic of modern industrial societies Economic growth has always been the defining characteristic of modern industrial societies With the invention of the locomotive and steamship, manufacturers were able to more easily access natural resources which resulted in the shift from handicrafts to mass production With the invention of the locomotive and steamship, manufacturers were able to more easily access natural resources which resulted in the shift from handicrafts to mass production W.W. Rostow’s modernization theory divides a nation’s history of economic growth into five stages which look at a nation’s society and economy. W.W. Rostow’s modernization theory divides a nation’s history of economic growth into five stages which look at a nation’s society and economy.

Stage 1: The Traditional Society Large agricultural sector and very limited manufacturing production Large agricultural sector and very limited manufacturing production The way things were done in the past controls how things are done in the present The way things were done in the past controls how things are done in the present Resistance to technology simply because it is new Resistance to technology simply because it is new Life centers around family with strong attachments to spiritual life (church) Life centers around family with strong attachments to spiritual life (church) Examples: Europe in the Middle Ages; many LDC’s today

Stage 2: Preconditions for Takeoff New ideas emerge that challenge long-standing traditions New ideas emerge that challenge long-standing traditions Although radical, these ideas prepare the people of the country for alternative means of production allowing for political reforms and a more effective central government Although radical, these ideas prepare the people of the country for alternative means of production allowing for political reforms and a more effective central government Examples: Europe during the Renaissance

Stage 3: Takeoff Tradition finally gives way to the new ways of doing things Tradition finally gives way to the new ways of doing things Food production becomes commercialized and more efficient Food production becomes commercialized and more efficient in national income finances the development of natural resources and industrial expansion is made possible by the growth of the labor force and new markets for consumer goods in national income finances the development of natural resources and industrial expansion is made possible by the growth of the labor force and new markets for consumer goods Great economic growth takes place but at the cost of family Great economic growth takes place but at the cost of family Society as a whole becomes less religious and more secular Society as a whole becomes less religious and more secular Examples: Great Britain around 1800 (Industrial Revolution), US by 1820 and Canada between 1890 and 1914

Stage 4: The Drive to Technological Maturity Sustained period of refinements to technology which leads to manufacturing production so high it exceeds the capacity of the domestic market resulting in international trade Sustained period of refinements to technology which leads to manufacturing production so high it exceeds the capacity of the domestic market resulting in international trade Widespread poverty is eliminated and society as a whole actively pursues higher living standards Widespread poverty is eliminated and society as a whole actively pursues higher living standards Leisure time and people begin to question the role industry plays in eroding traditional and family values Leisure time and people begin to question the role industry plays in eroding traditional and family values Examples: Great Britain in 1840, US in 1860 and Canada between 1914 and 1950; more recently Mexico and South Korea

Stage 5: High Mass Consumption The population has become primarily urban The population has become primarily urban Living standards for the majority of the people are high, exceeding basic needs Living standards for the majority of the people are high, exceeding basic needs Mass production triggers mass consumption; people are taught to “need” products Mass production triggers mass consumption; people are taught to “need” products Examples: US was first to enter this stage, followed by Canada and other industrialized nations

Measuring the Wealth of Countries: GNP Organizations such as the World Bank use an annual calculation called Gross National Product (GNP) to measure a country’s wealth Organizations such as the World Bank use an annual calculation called Gross National Product (GNP) to measure a country’s wealth The GNP is the sum total of the country’s Gross Domestic Product (GDP), or income earned from all domestic goods and services, plus the net income earned on foreign investments The GNP is the sum total of the country’s Gross Domestic Product (GDP), or income earned from all domestic goods and services, plus the net income earned on foreign investments GNP= GDP+ net income on foreign investments

Measuring the Wealth of Countries: GNP continued.. Usually, the GNP for a country is divided by the country’s total population to provide a figure called GNP per capita, or for each person Usually, the GNP for a country is divided by the country’s total population to provide a figure called GNP per capita, or for each person GNP per capita= GNP/country’s total population GNP per capita= GNP/country’s total population Some economists use per capita GNP to measure a country’s standard of living, or the average degree of material comfort that a country’s people enjoy Some economists use per capita GNP to measure a country’s standard of living, or the average degree of material comfort that a country’s people enjoy Per Capita GNP US$765 are LLDC’s Per Capita GNP US$765 are LLDC’s Per Capita GNP US$766-US$9385 are LDC’s Per Capita GNP US$766-US$9385 are LDC’s Per Capita GNP US$9386 are MDC’s Per Capita GNP US$9386 are MDC’s

Measuring the Health of Countries: The Human Development Index Some economists state that measuring a country’s standard of living by per Capita GNP solely is misleading Some economists state that measuring a country’s standard of living by per Capita GNP solely is misleading This is cause because the method ignores pockets of terrible poverty that exist in some MDC’s and the pockets of wealth that exist in many LDC’s This is cause because the method ignores pockets of terrible poverty that exist in some MDC’s and the pockets of wealth that exist in many LDC’s Second, money should not be the only criterion of a nation’s well being; social factors such as education levels, life expectancy, gender equality, and freedom from persecution apply Second, money should not be the only criterion of a nation’s well being; social factors such as education levels, life expectancy, gender equality, and freedom from persecution apply

Measuring the Health of Countries: The Human Development Index continued… There have been a number of attempts to devise a more complete system of measuring a country’s standard of living There have been a number of attempts to devise a more complete system of measuring a country’s standard of living Today, the most common and authoritative measurement of living standards is the United Nations Human Development Index Today, the most common and authoritative measurement of living standards is the United Nations Human Development Index Each year, the UN releases its Human Development Report, which includes a list that ranks every country in the world according to three basic factors: Each year, the UN releases its Human Development Report, which includes a list that ranks every country in the world according to three basic factors: 1) Longevity (life expectancy) 1) Longevity (life expectancy) 2) Knowledge (literacy rates and educational attainment) 2) Knowledge (literacy rates and educational attainment) 3) Income (GDP per capita) 3) Income (GDP per capita)