1. Introduction: “What Is Poverty and Who Are the Poor? ”

2. Definition of Poor

3. http://www.flatrock.org.nz/topics/odds_and_oddities/ultimate_in_unfair.htm

4. Economic Terminology Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. –Current standard = $1.25/day PPP Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

5. 1,000,000,000 ($1.00) Over 1 Billion People Live in “Extreme Poverty” World Bank 1,200,000,000 ($1.25)

6. Over 1 Billion People Live in “Extreme Poverty” World Bank Source: http://www.worldbank.org/en/topic/poverty

7. Extreme/Absolute Poverty $1.25 per Day Unthinkable poverty in U.S. terms –In U.S., 80-90% of poor (below US poverty line) Color television, Microwave, Cell phone Clean running water Extreme Poverty –Near 0% have above amenities Spend 73% of budget on food –over 50% of children malnourished

8. Economic Terminology Income Wealth GDP (Gross Domestic Product) Per capita GDP Why do we use GDP to measure poverty?

9. Low, Middle, & High Income Nations http://databank.worldbank.org/data/views/reports/map.aspx 2011 Data, 2012 Data not available as of 05.29.13

10. The number of extreme poor has declined by 650 million since 1981

11. Share of World Population in Poverty, 1820 - 1998

12. Height Is a Proxy for Economic Well-Being

13. What does Capitalism have to do with Poverty?

14. Economic Freedom of the World Index (Fraser Institute) Measure degree to which policies & institutions are supportive of economic freedom - Size of Government - Legal Structure - Security of Property Rights - Access to Sound Money - Freedom to trade Internationally - Regulations of Credit, Labor and Business

15. Economic Freedom of the World Map 2012 Annual Report (2010 Data)

16. Economic Freedom Ratings 2012 Annual Report (2010 Data)

17. Economic Freedom of the World Index International News Release: http://www.freetheworld.com/release.html

18. Economic Freedom Ratings 2012 Annual Report (2010 Data)

19. Per Capita Income and Economic Freedom Quartile Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

20. Real Gross Domestic Product Per Capita (1990$) Area1000150017001820195219952001 Europe$400~$6408701,1304,37013,95019,256 USA6001,26010,65023,38027,948 India530 6101,5701,957 China450600 5403,2003,583 Africa400 1,2201,489 World4205506006702,2705,1906,049 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

21. Income Share of the Poorest 10% and Economic Freedom Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

22. Income Level of the Poorest 10% and Economic Freedom Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

23. Economic Growth and Economic Freedom (1990-2010) Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

24. Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

25. Life Expectancy and Economic Freedom Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

26. People live longer in richer Nations! http://www.youtube.com/watch?v=jbkSRLYSojo

27. Years of Life Expectancy at Birth Place Middle Ages Select Years 1950-551975-802012 France~30 (1800)667481.7 UK20-30~36 (1799- 1803) 697380.3 India25 (1901-11) 395365.8 China25-35 (1929-31) 416573.7 Africa384850 World20-30466067 Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (1998); UNDP(2012) http://hdr.undp.org/

28. Economic Freedom and Corruption Higher values indicate lower levels of corruption Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.

29. Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Private Property Rights Rule of law Open, competitive markets Entrepreneurship and innovation Proposition: A nation’s institutions determine its ability to reduce poverty.

30. Serious deprivations in many aspects of life Developing countries Health 968 million people without access to improved water sources (1998) 2.4 billion people without access to basic sanitation (1998) 34 million people living with HIV/AIDS (end of 2000) 2.2 million people dying annually from indoor air pollution (1996) Education 854 million illiterate adults, 543 million of them women (2000) 325 million children out of school at the primary and secondary levels, 183 mil. girls (2000) Children 163 million underweight children under age five (1998) 11 million children under five dying annually from preventable causes (1998) Why Should We Care?

31. The Big Picture Until the 1750’s extreme poverty was the standard for all of human history. Since 1750 economic growth has lifted large sections of humanity to levels of wealth unheard of previously. The engine of economic growth is reducing poverty rates worldwide. Capitalism consists of institutions that help promote economic growth.

32. ~1750

34. INTERNATIONAL LINKAGES Goods and Services Capital and Labor Information and Technology Money UNITED STATES ECONOMY OTHER NATIONAL ECONOMIES Trade Flows Resource Flows

35. Trade Choices You have $500 to spend and your alternatives are to: 1.Purchase one U.S. made DVD player and one U.S. made bicycle. or 2.Purchase one Japanese made DVD player and one Korean made bicycle and one case of French wine. or 3.Use the $500 for investment in the stock of a Canadian company. Which do you choose to do?

36. Bicycle Italy JapanAustralia USA Taiwan

39. Trade? Why? 1-Dependence 2-Efficiency 3-Choices

40. Adam Smith: The Wealth of Nations (1776)

42. Brown Bag Trading Game Instructions Supplies: –Brown bags. –$1 items brought to class by the students or faculty. Items should be varied – if everyone brings same item there will be no trade!

43. Brown Bag Trading Game Instructions Instructions Mark the bottom of the bags as A, B, C, D in equal proportions! Place items in the bags. Distribute bags randomly to students. Have students seat in the classroom by designated letter. Ask students to not share with others what is in the bag! A B C D BD AC

44. Brown Bag Trading Game 1 st round – No Trade Value VALUEINITIALCOMPAREA/B/C/DAB/CDABCD 5II 4III 3IIIII 2IIIIIIII 1IIIIIIIII TOTAL

45. Brown Bag Trading Game Round 2 - Compare with Other Students VALUEINITIALCOMPAREA/B/C/DAB/CDABCD 5II? 4III? 3IIIII? 2IIIIIIII? 1IIIIIIIII? TOTALSum

46. Brown Bag Trading Game Round 3 – Trade with Same Letters Only VALUEINITIALCOMPAREA/B/C/DAB/CDABCD 5II?III 4 ?IIIII 3 ?IIIIIII 2IIIIIIII?IIIII 1IIIIIIIII?IIIII TOTALSum

47. Brown Bag Trading Game Round 4 – Trade Zones VALUEINITIALCOMPAREA/B/C/DAB/CDABCD 5II?IIIIIIIII 4III?IIIIIIIIIIII 3IIIII?IIIIIIIIIIIII 2IIIIIIII?IIIIIIIII 1IIIIIIIII?IIIIIIII TOTALSum

48. Brown Bag Trading Game FREE TRADE VALUEINITIALCOMPAREA/B/C/DAB/CDABCD 5II?IIIIIIIIIIIIIIIIII 4III?IIIIIIIIIIII 3IIIII?IIIIIIIIIIIIIIII 2IIIIIIII?IIIIIIIIIII 1IIIIIIIII?IIIIIIIII TOTALSum

50. Lesson 2: “Property Rights and the Rule of Law” Property Rights Property Rights benefit the poor by making owned capital secure and productive.

51. Formal Legal Characteristics Definable Enforceable Transferable

52. An Important Note The term “Property Right” is shorthand for Human Rights. –The right to freely use and transfer possessions including yourself. People, Not Property. –Recognition of people’s right of ownership to themselves and their labor.

53. Defined but not Enforced A right that is defined but not enforced is useless. Defending and enforcing Property Rights is paramount.

54. Property Rights and Growth Property Right holders have an incentive to preserve their property. Owners consider the future. Owners will improve a property. –The value of improvements reside with the owner.

55. Investment Secure property rights make investment more likely. Property Rights allow people to obtain debt. –Use of past and future incomes. –Collateralization is of greatest benefit to the poor.

56. Property Rights and the Poor Property Rights are of the greatest benefit to the poor. –The rich can enforce rights over their property. –The poor cannot. The definition and enforcement of Property Rights gives the poor the same right enjoyed by the rich. Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

57. Enforcing the Rules Rule of Force –Anarchy Rule of Men –Laws are enforced at the good will of the enforcer. Rule of Law –Both the governed and the governing are ruled by the same laws.

58. Big Picture Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources. In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

59. Big Picture To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

60. Lesson 3: “Competition Opens Markets to the Poor” The Role of Competition

61. To Compete or Not? The question is not whether we shall have competition, but what forms it will take. -Paul Heyne Competition will always occur. –Scarcity We cannot fulfill all our wants at no cost.

62. Methods of Rationing Scarce Goods and Services pricesprices command (someone decides)command (someone decides) majority rulemajority rule contestscontests by forceby force votingvoting first-come-first- servedfirst-come-first- served sharing equallysharing equally lotterylottery personal characteristicspersonal characteristics need or meritneed or merit

63. Non-Market Competition What determines participation? –Connections –Wealth –Etc. What determines production? –No effective production signals. –No effective incentives to innovate.

64. Market Competition –Suppliers compete with Suppliers (Producers) –Demanders compete with Demanders (Consumers) –All are trying to Maximize Profits/Utility

65. Revenue and Costs Producers can increase profits by: –Sell more at lower prices (Elastic Demand). –Lower costs –Innovate new goods that can command a premium.

66. Q o D1D1 Quantity Price S1S1 P Q* P* Prices and Welfare Consumer Surplus Producer Surplus

67. Prices and Production Prices are determined by the interaction of the Supply and Demand for a good. D S PePe QeQe D S PePe QeQe P2eP2e Q2eQ2e An Increase in the Supply of a good increases quantity traded and lowers price

68. Q o D1D1 Quantity Price P Q1Q1 Q2Q2 P1P1 P2P2 S2S2 S1S1 Prices and Production

69. THE RESULT Innovation: Cost Cutting (processes) Quality/product improvement

71. Case Study – Opening Markets in China 1977-78 250 million Chinese peasants with incomes below the country’s official poverty line of approximately 70 cents (U.S.) per day. 600-700 million Chinese living on less than $1 per day, the commonly used international poverty line. Most of the population were peasants, herded together into communal farms. This system produced very poor economic results with widespread poverty and periodic famines.

72. Case Study – Opening Markets in China 1978 Economic reforms begin: limited property rights and open markets Communes were broken up and families given individual plots of land and families were allowed to sell some of their output in farm markets. The right to enter the market with their produce drastically changed the incentives facing Chinese farmers. This institutional reform led to a dramatic surge in grain production in China and fueled spectacular poverty reduction.

74. The Big Picture Competition and Markets benefit the poor by –Providing more goods at lower prices. –Increasing the quality and variety of goods available. –Providing opportunities for work. –Stimulating entrepreneurial activities. –Unleashing the talent and abilities that were always there.

75. Markets create wealth and foster economic growth Benefit the poor in ways that are most important to them, providing Wealth, Dignity, and Mobility The Big Picture

76. Provide the Framework and Incentives for the Creation of Wealth Property Rights Rule of law Competitive markets Entrepreneurship / Innovation Institutions of Capitalism