1. The Wealth of Nations and Economic Growth
Chapter 6 e.
© 2010 Worth Publishers Modern principles: macroeconomics Cowen and Tabarrok

2. Economic growth is a matter of life and death to the 1
Economic growth is a matter of life and death to the 1.8 million children who die of diarrhea each year globally.

3. Chapter Outline
Key Facts about the Wealth of Nations and Economic Growth
Understanding the Wealth of Nations
Incentives and Institutions
Takeaway
Appendix: The Magic of Compound Growth Using a Spreadsheet
See the Invisible Hand Blog (click) for more examples
STIH has many great posts for this chapter, including two very important TED talks about economic growth (one by Alex Tabarrok).

4. Key Facts about the Wealth of Nations and Economic Growth
Fact One: GDP per Capita Today Varies Enormously among Nations
hans
About the video- From TED: Why you should listen to him:
Even the most worldly and well-traveled among us will have their perspectives shifted by Hans Rosling. A professor of global health at Sweden's Karolinska Institute, his current work focuses on dispelling common myths about the so-called developing world, which (he points out) is no longer worlds away from the west. In fact, most of the third world is on the same trajectory toward health and prosperity, and many countries are moving twice as fast as the west did. What sets Rosling apart isn't just his apt observations of broad social and economic trends, but the stunning way he presents them. Guaranteed: You've never seen data presented like this. By any logic, a presentation that tracks global health and poverty trends should be, in a word: boring. But in Rosling's hands, data sings. Trends come to life. And the big picture — usually hazy at best — snaps into sharp focus. Rosling's presentations are grounded in solid statistics (often drawn from United Nations data), illustrated by the visualization software he developed. The animations transform development statistics into moving bubbles and flowing curves that make global trends clear, intuitive and even playful. During his legendary presentations, Rosling takes this one step farther, narrating the animations with a sportscaster's flair. Rosling developed the breakthrough software behind his visualizations through his nonprofit Gapminder, founded with his son and daughter-in-law. The free software — which can be loaded with any data — was purchased by Google in March (Rosling met the Google founders at TED.) Rosling began his wide-ranging career as a physician, spending many years in rural Africa tracking a rare paralytic disease (which he named konzo) and discovering its cause: hunger and badly processed cassava. He co-founded Médecins sans Frontièrs (Doctors without Borders) Sweden, wrote a textbook on global health, and as a professor at the Karolinska Institut in Stockholm initiated key international research collaborations. He's also personally argued with many heads of state, including Fidel Castro. As if all this weren't enough, the irrepressible Rosling is also an accomplished sword-swallower — a skill he demonstrated at TED2007.
Go here to watch a 20 minute TED video about economic growth data.

5. Key Facts about the Wealth of Nations and Economic Growth
Wealth and Health go Together.
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005

6. Key Facts about the Wealth of Nations and Economic Growth
Fact Two: Everyone Used to be Poor

7. Key Facts about the Wealth of Nations and Economic Growth
A Primer on Growth Rates
How is economic growth measured?
Where yt is per capita real GDP in year t
Example: Year real GDP per capita
2008 $15,000
$15,500

8. The Rule of 70 (The Magic of Compounding)
Example: If real GDP per capita is growing at an annual growth rate of 3.5%, it will double in:
The moral? Small improvements in growth add up fast (the power of compounding).

9. A Little Growth Goes a Long Way

10. Key Facts about the Wealth of Nations and Economic Growth
Fact Three: There are Growth Miracles and Growth Disasters
See for a wealth of interactive (and animated) cross-country data.

11. Understanding the Wealth of Nations
The Factors of Production are important
Physical capital: the stock of tools including machines, structures, and equipment.
Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.
Technological knowledge: knowledge about how the world works that is used to produce goods and services.

12. What Causes Economic Growth?

13. Understanding the Wealth of Nations
Why do some nations have faster growth than others?
Besides factors of production, incentives and institutions matter.
Institutions = “rules of the game” that structure economic incentives.
Institutions of Economic Growth
Property rights
Honest government
Political stability
A dependable legal system
Competitive and open markets

14. Korea’s Experiment Before division after WWII
Shared the same people and culture.
Had similar levels of physical capital.
Had access to the same technology.
North Korea became a communist state with a centrally planned economy.
South Korea adopted the capitalist free market model.
The result 50 years later is dramatic as seen in the following photo from outer space.

15. North and South Korea at night

16. Institutions Property rights: the right to benefit from one’s effort.
Provide incentives to work hard.
Encourage investment in physical and human capital.
Are important for encouraging technological innovation.
Without property rights:
Effort is divorced from payment, reducing incentives.
Free riders become a problem.

17. Institutions
Free Rider = someone who consumes a resources without working or contributing to the resource’s upkeep.
China’s “Great Leap Forward”- which introduced farming collectives- reduced incentives to work million starved.
1978, farmers in Xiaogang met in secret to devise a plan to keep some of their produce.
Productivity improved so quickly the government allowed the experiment to proceed.
Food production increased 50% in 5 years

18. Institutions Honest Government
Property rights are meaningless unless government guarantees property rights.
Corruption bleeds resources away from productive entrepreneurs.
Corruption takes resources away from more productive government activity.

19. Corruption and Growth Don’t go Together
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005

20. Corruption Who’s Who List

21. Institutions Political Stability
Changing governments without the rule of law creates uncertainty which leads to less investment in physical and human capital.
In many nations civil war, military dictatorship, and anarchy have destroyed the institutions necessary for economic growth.
Bullet casings from Liberia’s Civil War: Bad soil for anything to grow.

22. Institutions Dependable Legal System
A good legal system facilitates contracts and protects property from others (including government).
Poorly protected property rights can result from too much government or too little government.
In India, residents who purchase land have to do so more than once because of lack of proper record keeping.

23. Institutions Competitive and Open Markets
Encourage the efficient organization of resources.
About half the differences in per capita income across countries is explained by a failure to use capital efficiently.
One study found that if India used its physical and human capital as efficiently as the U.S., India would be four times richer than it is today.
Click here for Alex Tabarrok’s TED talk about competition and economic growth (15 mins).
About the talk, from TED: The "dismal science" truly shines in this optimistic talk, as economist Alex Tabarrok argues free trade and globalization are shaping our once-divided world into a community of idea-sharing more healthy, happy, and prosperous than anyone's predictions.

24. Institutions Why do poor countries use their capital inefficiently?
Whether inadvertently or not, inefficient and unnecessary regulations:
Create monopolies and impede markets
Example: until recently in India, it was illegal to produce shirts using large-scale production
Economies of scale = the advantages of large-scale production that reduce average cost as quantity increases

25. Think-pair-share: Why do you think expensive red tape is hard to get rid of in many poor countries?

26. Key Concepts Economic growth Physical capital Human capital
Technological knowledge
Institutions
Free rider
Economies of scale

27. If a nation doubles its GDP per capita in 20 years, what is its annual growth rate?
3.5%
4.2%
6.5% 7%

28. If a nation doubles its GDP per capita in 20 years, what is its annual growth rate?
3.5%
4.2%
6.5% 7%

29. What is the most proximate (or direct) cause of growth in real GDP per capita?
the factors of production
political system in the economy
institutions
incentives

30. What is the most proximate (or direct) cause of growth in real GDP per capita?
the factors of production
political system in the economy
institutions
incentives

31. Human capital is the 
stock of tools including machines, structures, and equipment.
productive knowledge and skills that workers acquire through education, training, and experience.
knowledge about how the world works that is used to produce goods and services.
organization skills of business owners.

32. Human capital is the 
stock of tools including machines, structures, and equipment.
productive knowledge and skills that workers acquire through education, training, and experience.
knowledge about how the world works that is used to produce goods and services.
organization skills of business owners.

33. Which of the below is not directly related to human capital? 
a life-saving drug
schooling
work experience
an understanding of chemistry

34. Which of the below is not directly related to human capital? 
a life-saving drug
schooling
work experience
an understanding of chemistry

35. Why did so many Chinese farmers and workers starve under “The Great Leap Forward”?
The number of workers on communes was reduced.
The Chinese people did not know how to farm in certain geographic areas.
The incentive to work hard was low since the rewards were so minimal.
All of the answers are correct.

36. Why did so many Chinese farmers and workers starve under “The Great Leap Forward”?
The number of workers on communes was reduced.
The Chinese people did not know how to farm in certain geographic areas.
The incentive to work hard was low since the rewards were so minimal.
All of the answers are correct.