Cross Country Comparison of Macroeconomic Outcomes and ...
Economic Growth:(“Economics” – Chapters 8 and 9)How can we define and what leads to economic growth? Economic Growth and Development around the World:“Economic Growth” and “Development” are desirable goals for all societies (i.e., people in all countries would prefer a higher standard of living for their current generation and for future generations) => but, these goals are in many ways “more urgent” in LDC’s (e.g., Chile, Panama, Bolivia, Rwanda, Ethiopia, Bangladesh)Economic Development – improvements (over time) in a society’s quality of life and standard of living.by definition, very qualitative in nature.includes, but is not limited to, increased consumption of and access to material goods and servicesSocioeconomic “Quality of Life” Measures:When assessing Economic Development, we would want to look at changes in GDP… But, we would also want to look further at things which would indicate a “higher standard of living” => GDP Per Capita is clearly not the only thing that matters for “overall quality of life.” Other factors that are likely important:Life Expectancy at birth: expected lifespan at birth, measured in years Infant Mortality Rate: number of deaths per 1,000 live birthsLiteracy Rates: percentage of population over age of 15 that can read and writeInternet Users: percentage of population that uses the InternetAverage Annual Working Time: average number of hours worked per year per workerCountryLifeExpectancyInfantMortalityLiteracyRatesInternet UsersAvg Annual Work TimeJapan83.912.7899%80.0%1,728Australia81.904.6199%76.0%1,693Italy81.863.3898%53.7%1,774Canada81.484.9299%81.6%1,702Norway80.203.5299%93.4%1,426Germany80.073.5499%81.9%1,413U.S.A.78.376.0699%79.0%1,787Chile77.707.3496%45.0%2,047Mexico76.7417.2986%31.0%2,250China74.6816.0692%34.3%not avail.Estonia73.587.0699%74.1%1,924Turkey72.5023.9487%39.8%1,877India66.8047.5761%7.5%not avail.Ethiopia56.1977.1243%0.75%not avail.Zimbabwe49.6429.5091%11.5%not avail.Economic Growth – sustained increases in the real GDP of an economy over a long period of time.12,500Cars32,00048,500017,2500PPF 2012Wheatgraphically illustrated by an outward shift of the PPFPPF 1992measured quantitatively as the percentage increase in Real GDPGDP Growth Rate – annual percentage change in the value of Real GDPmost countries typically experience moderate, positive growth in most years.Table 8.1 – Growth of Real GDP (1991-2007)CountryAvg % Growth Per YearChina10.4%India6.3%Africa3.8%United States3.0%United Kingdom2.5%France1.9%Germany1.7%Japan1.3%Catch-up Effect – the theory stating that (all other factors fixed) the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up.”When observing GDP growth rates (or, for that matter, any growth rate), keep in mind the cumulative effect of “growth on top of growth”…Question: if a country were to grow at “9% per year,” how long would it take for GDP to double (i.e., increase by 100%)?Hint: it might seem like the obvious answer is “about 11 years” (since (100/9)≈11)… but it’s actually a shorter amount of time because in future years the growth is “growth on top of growth”…Answer: it would actually only take about 8 years for GDP to double… a more general approximation is given by the “Rule of 72”…“Rule of 72” – a variable that grows at a constant rate of “X% per period” will double in value in approximately “(72/X) periods.”What if India could grow at 9% per year for the next 32 years (China grew at roughly this rate between 1978 and 2008)…GDP would double approximately every 8 yearsThus, they would experience “4 doublings”Which would imply that GDP would be “2 times 2 times 2 times 2” times larger – that is, “16 times” larger – 32 years from now!What can lead to Economic Growth?Basically, any “change” which would place the PPC further “from the origin”…Recall, “placement of PPC” depends upon how many resources a society has available and how productive those resources are…Five broad sources of economic growth (i.e., changes that would lead to an “outward movement of PPC over time”)...1.Increases in the quantity of labor available (i.e., more workers)2.Increases in the quality of labor available (e.g., more highly educated workforce)3.Increases in the quantity of physical capital (e.g., factories, trucks, computers, electricity plants)4.Embodied Technical Change – technical change that results in an improvement in the quality of capital (e.g., computers with word processors, as opposed to a manual typewriter from the early 1900s).5. Disembodied Technical Change – technical change that results in a change in the production process, which results in a different amount of output being produced from the same quantities of capital and labor (e.g., use of computers to reduce costs of transferring information and to streamline accounting procedures)Common ways to achieve economic growth…1.Deliberate investments in human capital and physical capital (either by individuals or society)when a society devotes more resources to producing capital goods today, they will have more capital goods available in the future (but, at the expense of having fewer consumer goods in the present period)Capital Goods001992 PPCConsumption Goods2012 PPC, if “A” is chosen in 1992…BA2012 PPC, if “B” is chosen in 1992…2.Deliberate investments by society in overhead capital (social overhead capital – basic infrastructure projects such as roads, power generation, and irrigation systems)3.Realize improvements in technology (i.e., technical change)The bulk of economic growth in recent decades and recent centuries has resulted from improvements in technology (e.g., Industrial Revolution)Technical change takes place in two stages…Invention – an advance in knowledgeInnovation – the application of new knowledge to produce a new product or to produce an existing product more efficientlyImpediments to achieving growth…I.difficulties in developing physical capitalVicious-cycle-of-poverty hypothesis – poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that would help them growargument has some merit, but clearly cannot be universally true, since, if it were always true then no nation would ever developin reality, scarcity of financial capital in many poor countries is caused by a lack of incentives for saving/investment within the countryCapital flight – the tendency for both human capital and financial capital to leave developing countries in search of higher expected rates of return elsewhere with less riskMany wealthy people in developing countries invest their savings in the U.S. or Europe (richer countries with more stable political systems) because doing so offers a higher return and/or less risk => as a result, these funds are not used to develop capital at home (in the poor country)II.lack of investments in social overhead capitalmany types of infrastructure (e.g., highways, power generation plants, telecommunications systems) are most easily built by governmentthis requires public funding => many poor countries struggle with raising taxes to fund such projectse.g., many argue that India’s growth has begun to slow, partly because of its poor rail transport systemIII.difficulties in developing human resourcespoor health outcomes degrade human resources2009: 1 million people died of malaria (mostly in Africa)2009: 2 million people died of HIV/AIDS (again, mostly in Africa)brain drain – tendency for talented people from developing countries to become educated in a developed country and remain there after graduationa talented doctor, engineer, or computer scientist can earn much more in the U.S. than in a third world countryas a result, the most talented workers are often siphoned off the top of the labor force in a poor countryIV.corruptiongovernment plays a key role (either directly or indirectly) in determining how economic resources are used, particularly within the context of developing capital and encouraging innovationgovernment corruption can result in a misallocation of resources (e.g., contracts awarded by bribes as opposed to by merit; “theft” of resources/profits by government officials) and prevent growthlevels of corruption in selected countries (page 142)very high: Nigeriahigh: Russia, Indonesia, Pakistanmoderate: Vietnam, Iran, China, Mexico, Brazillow: Thailand, India, Turkeyvery low: U.S., Japan, France, GermanyStrategies for achieving growth…A.IMF and World Bank assist developing countries in the promotion of stable, market-oriented institutionsInternational Monetary Fund – international agency whose primary goals are to stabilize international exchange rates and to lend money to countries that have problems financing their international transactionsWorld Bank – international agency that lends money to individual countries for projects that promote economic developmentB.Industrial Policy – a policy in which the government actively picks industries to support as a base for economic developmente.g., Ministry of International Trade and Industry (MITI) in Japan has overseen industrial policy in the country since 1949C.Import Substitution – a trade strategy which attempts to develop domestic industries to produce goods to replace importse.g., policies pursued in the 1960’s and 1970s in India, Brazil, Egypt, Mexico, and ArgentinaD.Export Promotion – trade strategy which encourages domestic industries to produce goods for export (to wealthy consumers in developed countries)e.g., policies pursued by Japan in 1960s, Hong Kong, Singapore, South Korea, & Taiwan in 1970s, and more recently Brazil, Columbia, & Turkey ................
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