econ chapter 11

Economic Growth and the Wealth of Nations

©     GDP- Basic measure of a nation’s income

o   Value of all final goods and services produced in a country

o   GDP per capita is a basic measure of average living standards

©     Economic growth- the growth rate of real GDP per capita

©     Technology: knowledge available for use in production

©     Technological advance: introduction of new knowledge or production techniques

o   Produce more using less resources

©     Economic growth occurs when the resources and technology work together

©     Institutions and official and unofficial arrangements and rules that shape decision-making and interactions between residents of a country

©     Important institutions for economic growth

o   1. Political stability and rule of law

§  Liberia, 1980-2003

·      Staged elections, rebel takeovers, violent upheavals, violence against citizens

·      About $4 billion in international aid given, meant for industry and medical infrastructure, most aid was seized by force by whoever thought they needed it

·      Nothing was done to eliminate instability to create an environment for economic growth

o   2. Private and enforced property rights

§  Individuals can own property and resources and the resulting output created by those resources

·      Perhaps the single greatest incentive for voluntary production

·      Workers and producers can own a share of what they produce, so there is an incentive to produce more and grow

·      Neg ex: famine

·      Pos ex: allowing and enforcing private property in China

o   3. Stable money and prices

§  High and unstable inflation creates uncertainty about future prices

·      Makes people reluctant to invest

·      In the US

o   The fed is charged with administering monetary policy

o   The fed is designed to be largely politically independent

o   Pursue price stability to promote long-run steady and sustainable economic growth

o   4. Competitive markets

§  Characteristics of competitive markets

·      It is easy for firms to enter and exit with few licensing or regulatory hurdles

·      Buyers can expect to find low prices and wide availability of goods

·      Survival of the fittest: outdated firms and products don’t survive

©     Efficient taxes

o   Taxes represent a trade-off

§  They must be high enough to support effective government

§  At the same time taxes change incentives by discouraging certain activity

§  Import tariffs (taxes on imported goods) impede growth, wide agreement among economists

o   Challenge: find a tax level that will support the government without crippling economic growth

©     Specialization and trade

o   Creates value and allows countries to consume goods they cannot produce on their own

o   Tariffs were very high before the great depression- one of the causes

o   Gradually removes and reduces tariffs and trade berries

©     Investment requires savings

o   Opportunities for investment expand if you have access to savings from around the world

o   If foreigners can funnel their savings into your economy, your firms can use these funds to expand, but why can also quickly pull-out funds

o   Some countries restrict flow of funds from abroad (called capital controls), leaving firms soley dependent on domestic savings.