Why Growth Rates Differ Chapter 8-3

Why Growth Rate Differ? A number of factors influence differences among countries in their growth rates.

Why Growth Rates Differ? Policies and institutions that alter Growth: savings and investment spending foreign investment education infrastructure research and development political stability the protection of property rights

Saving and Investment Spending To increase Physical Capital an economy must engage in Investment Spending Sources for Investment Spending: Household saving Government saving Foreign saving This makes banking system important to the economy

Foreign Investment Private Savings=Investment Spending When: Private Savings < Investment Spending Foreign investment covers the shortfall

Is Foreign Investment good or bad? Eventually foreigners have to be repaid with Interest and/or Profit Some Economist argue: Increase in Real GDP generated by foreign investment is greater than what is paid out. They bring new technology that diffuses through the economy.

Education Human Capital This affects Human Capital Physical Capital Statistical analysis comparing different countries suggests that education has more impact on growth than increase in Physical Capital

Infrastructure Roads, Power lines, Clean Water, Basic Public Health and other underpinnings for the economic activities

Research & Development Spending to create and implement new technologies

Political stability, Property rights and Govt. Intervention Political stability and protection of property rights are crucial ingredients in long-run economic growth. There’s not much point in investing in a business if rioting mobs are likely to destroy it or saving your money if someone with political connections can steal it.

Political stability, Property rights and Govt. Intervention Even when governments aren’t corrupt, excessive government intervention can be a brake on economic growth. If large parts of the economy are supported by government subsidies, protected from imports, or otherwise insulated from competition, productivity tends to suffer because of a lack of incentives.

Poor Countries Regulate Business the most…