Ch. 7 PP - The Wealth of Nations and Economic Growth

Economic wealth brings

wealth, which increases societal well-being

Wealthier nations have

Higher interest rates, life expectancy, nutrition, education opportunities, leisure, entertainment, fewer conflicts (civil wars and riots), and more material goods

1st Key fact about the wealth of nations and economic growth

GDP per capita varies enormously among nations

2nd Key fact about the wealth of nations and economic growth

Everyone used to be poor

3rd Key fact about the wealth of nations and economic growth

There are growth miracles and disasters

GDP per capita

is the total economic output of a country divided by its population, indicating the average income per person. (average about the distribution of wealth within each country)

Richer countries have

higher GDP per capita

In 2019, 10% (or 760 million) of world’s population

lived in a country with a GDP per capita of less than $4,000

In 2019, 70% of world’s population

Lived in a country with a GDP per capita equal to or less than $14,000

In 2019, 76% (or 5.8 billion) of world’s population

lived in a country with a GDP per capita of less than average

The distribution of world income states that poverty is

normal

Wealth is

unusual

GDP per capita in year 1 is estimated to be

$700 - $1,000 per year, which was the same in all major areas of the world

For most of human history

there was no long-run growth in real GDP per capita

GDP per capita today is

50 times larger in the richest countries than in the poorest

Economic growth

Measured as the growth rate of real GDP per capita

Large differences in growth or real GDP per capita

slow growth sustained over long periods of time.

Exponential growth or compounding

Growth that builds on top

Economic growth is measured as

(Original real GDP per capita - final real GDP per capital) divided by final real GDP per capita times 100

economic growth

growth rate of real GDP per capita

Growth rate

percentage change in real GDP per capita over time.

Measuring growth

Rule of 70 approximates the length of time needed for a growing variable to double

Rule of 70

doubling time = 70/ growth rate percent

Growth miracles

phenomena where countries experience rapid economic growth, often doubling their GDP per capita in a short period.

The U.S. is 1 of the worlds wealthiest countries because

It grew slowly but consistently for more than 200 years

From 1950 to 1970 Japan grew

at an average annual rate of 8.5%, transforming into one of the world's leading economies.

In 1950, South Korea had about the same as

Nigeria

From 1970 to 1990 South Korea GDP per capita

grew at a rate of 7.2% per year and is now on par with many European economies

Growth disasters

refers to periods when economies fail to achieve potential growth, often due to factors like conflict, poor governance, or economic mismanagement.

Nigeria has barely grown since 1950

It was poorer in 2005 than in 1974, when high oil prices briefly bumped up its per capita GDP.

In 1900, Argentina was one of the richest countries in the world, with GDP per capita almost as large as that of the United States.

By 1950 GDP per capita had fallen that of the U.S. By 2000 it’s GDP per capita was less than 1/3 of the U.S.

Bad news of economic growth

Most of the world is poor, more than 1 billion people live on incomes of less than $3 per day which leads to reduced prospects of health, happiness, and peace

Good news economic growth

Economic growth has lifted millions out of poverty, improved living standards, and increased access to education and healthcare.

Causes in GDP per capita include factors of

production, incentives, and institutions

Physical capital

The stock of tools that include machines, structures, and equipment.

Human capital

The productive knowledge and skills that workers acquire through education, training, and experience.

Countries with higher GDP per capita have a lot of factors of production

physical capital, human capital, and technological knowledge.

More and better physical capital

Makes workers more productive and take advantage of more sophisticated tools

Make Wokers more productive

Greater quantities of physical and huma capital per worker

Increase human capital

Education

Technological knowledge

The understanding and skills necessary to produce goods and services efficiently, often leading to innovations and improvements in productivity.

Improved technological knowledge

leads to enhanced production methods and increased efficiency in creating goods and services (potentially boundless)

Better technological knowledge has allowed U.S. farms

increase their output two and a half times since 1950, and while using less land.

Increase technological knowledge

research and development

organization of factors of production

Depends on incentives and institutions

Institutions

are the rules and norms that structure social interactions, influencing economic performance and growth.

Institutions include laws and regulations, but also

customs, practices, organizations, and social mores

Institutions that promote growth

create incentives that align self-interest with the social interest

Wealthy countries have institutions that make it

in people's self-interest to invest in physical capital, human capital, and technological knowledge.

Institutions of economic growth include

Property rights, Honest government, Political stability, A dependable legal system, Competitive and open markets

Property rights

are legal rights that individuals or firms have to use their property as they see fit, which encourages investment in physical and human capital

free ride

is a situation where individuals benefit from resources or services without paying for them, leading to underinvestment in those resources.

communal property

is a type of property ownership where resources are owned and managed collectively by a group, often leading to shared benefits and responsibilities.

When China switched from communal to individual farms

food production increased by 50%, and 170 million people were lifted above the lowest poverty line.

Savers won’t invest if

they don't expect that they will receive a return for their savings and investment.

Property rights encourage

technological innovation

Companies will not undertake research and development unless

they expect to profit from it

Corpution

involves the abuse of power for personal gain, undermining economic growth and trust in institutions.

Corruption is like

a tax that bleeds resources away from productive entrepreneurs.

Resources invested in bribing

cannot be invested in machinery and equipment

Few people want to be entrepreneurs when corruption is high because

They know their wealth will be stolen

In many nations, civil war, military dictatorships, and anarchy

have destroyed the institutions necessary for economic growth.

Good legal system

facilitates contracts and protects private parties from expropriating one another.

Poorly protected property rights

stem from either too much or too little government.

Some legal systems are of such low quality

no one knows for certain who owns what.

difficult to borrow money

lenders aren't sure they will get their money back.

the differences in per capita income across countries are explained by

differences in the amount of physical and human capital. Additionally, not being able to use capital efferently

Competitive and open markets are one of the best ways

encourage the efficient organization of resources.

reasons for inefficient organization

Inefficient and unnecessary regulations, Red tape, or the time and cost to do tasks such as starting a business or enforcing a contract in a court of law, Barriers to free trade

Economies of scale

The advantages of large-scale production that reduce average cost as quantity increases.

Natural resources help explain

the differences in economic growth between countries, as access to accumulate physical and human capital

Transport is cheaper

over water than over land, so countries with access to water are more open to trade.

Landlocked countries

Lower GDP per capita than countries with access to a coast

Important to economic growth

History, ideas, geography, culture, and luck

economic growth

raised billions of people out of poverty

Poor countries

catch up to rich countries, and in a surprisingly short period.

Countries with a high GDP per capita

lots of physical and human capital per worker, organized using the best technological knowledge.

Countries with a high GDP per capita have institutions

encourage investment in physical capital, human capital, technological innovation, and the efficient organization of resources.

Institutions for increasing economic growth

property rights, honest government, political stability, a dependable legal system, and competitive and open markets.

red tape

The time and cost to do tasks such as starting a business or enforcing a contract in a court of law.