1. Economic Growth and the Wealth of Nations Chapter 16
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Economic Growth and the Wealth of Nations Chapter 16

2. The Importance of Economic Growth
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The Importance of Economic Growth
Per capita GDP is the nation’s GDP divided by its population. Growth of per capita GDP means more goods and services per person.
In most cases, higher levels of per capita GDP will mean that the typical person has a better diet, improved health and access to medical services, a longer life expectancy, and greater educational opportunity.

3. The Importance of Economic Growth
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The Importance of Economic Growth
Economic growth expands the sustainable output rate YF of an economy.
Consumption goods
Price Level
LRAS1995
LRAS2005
PPC2005 B
SRAS1995
SRAS2005
AD2005 A
PPC1995 P1
AD1995
Capital goods
Real GDP A
YF1995
YF2005

4. Per-Capita Income (in thousands of 1985 U.S. Dollars)
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Per-Capita Income (in thousands of 1985 U.S. Dollars)
1960
2002
4,462
6,338
Argentina
5,683
5,585
Venezuela
2,954
2,247
Japan
16,271
19,618
Hong Kong
Source: Robert Summers and Alan Heston, Penn World Tables, Mark 5.6 (Cambridge: National Bureau of Economic Research, 1994); and World Bank, World Development Indicators, CD-ROM, 2004.

5. Growth Rates among Nations
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Differences in
Growth Rates among Nations
The growth of per-capita GDP for high-income industrial countries,
high-growth LDCs, and low-growth LDCs, (1980–2002)
High-growth LDCs
High-income industrial
Low-growth LDCs
China
8.1%
United Kingdom
2.2%
Congo (Zaire)
-4.9%
South Korea
6.1%
Japan
2.1%
Sierra Leone
-3.3%
Taiwan
6.0%
Australia
1.9%
Haiti
-2.8%
Ireland
4.8%
United States
1.9%
Madagascar
-2.1%
Botswana
4.6%
Netherlands
1.8%
Niger
-2.0%
Thailand
4.6%
Italy
1.8%
Côte d’lvoire
-1.8%
Mauritius
4.4%
France
1.7%
Togo
-1.7%
Singapore
4.2%
Germany
1.7%
Nicaragua
-1.4%
Hong Kong
3.7%
Canada
1.6%
Venezuela
-1.3%
India
3.6%
Switzerland
0.7%
Nigeria
-1.1%
Sources: Derived from World Bank, World Development Indicators, CD-ROM, 2004; and Republic of China, Statistical Yearbook of the Republic of China, Only countries with a population of 2 million or more in 2002 are included in this table.

6. Questions for Thought:
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Questions for Thought:
1. Which of the following is true?
a. The fastest-growing economies in the world are mostly less developed countries.
b. The slowest growing countries in the world, many of which are experiencing declines in per capita GDP, are less developed countries.
2. “Other things constant, low income countries should be able to grow rapidly because they can either emulate or import at a low cost proven technologies from countries with higher incomes.”
-- Is this statement true?

7. Sound Institutional Environment
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Key Elements of a
Sound Institutional Environment
The following institutional elements are keys to the growth process:
secure property rights and political stability,
competitive markets,
stable money and prices,
free trade,
open capital markets, and,
avoidance of high marginal tax rates.

8. Role of Government and Economic Progress
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Role of Government
and Economic Progress
The economic, political, and legal environment is a major determinant of economic growth.
Governments help promote economic growth when they focus on two core functions:
Provision of a legal, regulatory, and monetary environment that enforces contracts and protects people and their property from the actions of aggressors (both domestic and foreign), and,
Provision of a limited set of public goods like roads and national defense that are difficult to provide through markets.

9. Role of Government and Economic Progress
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Role of Government
and Economic Progress
As governments expand beyond these core functions, however, the beneficial affects will eventually wane and become negative.

10. Size of government (percent of GDP)
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Size of government (percent of GDP)
Growth rate of the economy A B
If governments undertake activities in the order of their productivity, the growth of government will initially promote economic growth (move from A to B).
At some point, however, continued expansion of government will retard growth (moves beyond B).

11. Big vs. Small-Government Countries
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Economic Growth:
Big vs. Small-Government Countries
Countries w/ government spending
greater than 48% of GDP ( )
Average annual growth rate of GDP,
Sweden
58.2%
1.8%
Denmark
55.7%
2.0%
France
53.3%
1.8%
Austria
52.1%
2.2%
Finland
50.2%
1.7%
Belgium
50.2%
1.9%
Italy
48.3%
1.5%
Average
52.6%
1.8%
Countries w/ government spending
less than 37% of GDP ( )
Average annual growth rate of GDP,
Australia
36.2%
3.3%
United States
34.6%
2.9%
Ireland
33.8%
6.8%
Average
34.9%
4.3%
The average annual growth rate of OECD countries for the 1990 to 2003 period was greater for small government countries than for large government countries.

12. Questions for Thought:
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Questions for Thought:
1. “Most low income countries are poor because they lack the necessary natural resources for development.”
-- Is this statement true?
2. “In recent decades the highest rates of economic growth have been achieved by high income countries with the largest government expenditures as a share of GDP.” Is this statement true?

13. Questions for Thought:
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Questions for Thought:
3. Which of the following is most important if a country is going to achieve and sustain rapid economic growth?
a. large government expenditures as a % of GDP
b. institutions & policies supportive of competition (open markets) and freedom of exchange
c. free elections and political democracy
4. The growth records of Japan and Hong Kong during the last 50 years indicate that an economy can grow rapidly without:
a. securely defined property rights
b. abundant domestic resources
c. significant capital formation
d. adopting modern technology

14. Questions for Thought:
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Questions for Thought:
5. Which of the following is true?
a. International trade makes it possible for a nation to use more of its resources producing items it can supply economically and less producing goods that can be supplied domestically only at a high cost.
b. Trade barriers such as tariffs and import quotas will protect domestic jobs, expand employment, and help a nation achieve a higher standard of living.