1. Macro Chapter 16 Creating an Environment for Growth and Prosperity

2. 3 Learning Goals 1) 1)Explain the relationship between output and income 2) 2)Identify the general sources of economic growth 3) 3)Identify specific institutional factors that promote economic growth

3. The Importance of Economic Growth

4. Steady economic growth is desirable because: (1) Output growth means more goods and services per person (2) Output growth leads to income growth (3) People will make better decisions than if faced with highly variable changes (4) More people will be employed

5. Here’s the possible impact of just slightly reducing our long-run growth rate: If we grow at an average annual rate of 3%, national income will double about every 23 years. If we only grow at an average of 2.5%, national income will double about every 28 years. If we grow at an average of 3.5%, national income will double about every 20 years.

6. Here’s the possible impact of just slightly reducing our long-run growth rate: Starting with 2011 GDP of $15.2 trillion, if we grow at an average annual rate of 3% GDP will grow by about $79 trillion in your lifetime. If we only grow at an average of 2.5%, GDP will grow by about $55 trillion; $24 trillion less If we only grow at an average of 2%, GDP will grow by about $36 trillion; $43 trillion less

7. Key Sources of Economic Growth and High Incomes

8. 4 key sources of growth: 1) Gains from trade See gains from trade from Chapter 1- remember the trading game in class? Value is created through voluntary trade See comparative advantage from Chapter 2- each country should make the good/service for which they have a low opportunity cost

9. 2) Entrepreneurship and technology Joseph Schumpeter’s “creative destruction”

10. 3) Investment in physical and human capital Physical capital = machines, equipment, and buildings Human capital = knowledge and skills A tradeoff exists between consumption and investment Ceteris paribus, those countries who reduce consumption to increase investment grow faster

11. 4) Institutions Institutions = “rules of the game” or the policies and regulations that govern behavior Institutions can be both the official laws and societal norms

12. What Institutions and Policies Will Promote Growth?

13. See Thumbnail Sketch on p. 351 Key institutions: 1)Secure property rights and political stability 2)Competitive markets 3)Stable money and prices 4)Minimal regulation 5)Relatively low marginal tax rates 6)Trade openness

14. Other Factors: 1)Population Growth 2)Foreign Aid 3)Natural Resources 4)Climate and Location