Economic Growth: Institutions and Investment

Economic Growth: Institutions and Investment (Chapters 7 & 8)

Introduction to Economic Growth

  • Economic growth correlates with increased wealth, contributing significantly to societal well-being.

  • Wealthier nations exhibit several advantageous characteristics allowing for improved quality of life:

    • Higher infant survival rates: Health systems and nutrition support contribute to lower mortality rates among infants.

    • Increased life expectancy: Access to health services and better living conditions promote longer lives.

    • Improved nutrition: Wealth enables better access to food and healthcare, leading to overall better health.

    • Enhanced educational opportunities: Greater financial resources lead to better education systems, allowing more individuals to attain higher education.

    • More leisure and entertainment options: As income rises, people can afford leisure activities and entertainment.

    • Reduced conflicts: Countries with higher wealth levels tend to experience fewer civil conflicts and riots due to better governance and social stability.

    • Increased availability of material goods: Higher income levels correlate with greater consumption and access to a variety of goods.

Wealth Indicators (Comparative Data)

Criteria Analyzed:

  • Life Expectancy:

    • 1900-1920: 47 years

    • Recent Data (2020): 77 years (men), 81 years (women)

  • Infant Mortality Rate:

    • 1900-1920: 100 deaths per 1,000 live-births

    • Recent Data: 5.8 deaths per 1,000 live-births

  • Real Per Capita GDP:

    • 1900-1920: $4,800 (1990 dollars)

    • Recent Data: $52,667 (2020 dollars)

  • High School Graduation Rate:

    • 1900-1920: 22%

    • Recent Data: 83%

  • Electrification:

    • 1900-1920: 8%

    • Recent Data: 99%

GDP Growth Overview

  • A significant portion of the global population (76%) resides in nations where the annual GDP per capita is below the world average, indicating widespread poverty.

Historical Context of Poverty

  • Historically, the vast majority of the global population lived in poverty, leading to the examination of growth factors across different world regions.

Measuring Economic Growth

  • Rule of 70: A formula used to estimate the time required for an investment to double in size, calculated as ext{Years to double} = rac{70}{ ext{Annual Growth Rate ( ext{%})}}.

    • Example: With an annual GDP per capita growth rate of 3.5%, the time required for it to double is roughly rac{70}{3.5} = 20 ext{ years}.

Overview of Economic Growth Trends

  • Growth Miracles: Nations like the United States, Japan, and South Korea have experienced significant economic growth leading to increased GDP per capita.

  • Growth Disasters: Nations such as Argentina and Nigeria have faced economic challenges, resulting in stagnation or decline in GDP per capita.

Causes of Economic Growth

  • Factors of Production:

    • Physical Capital: The tools, machines, and buildings used in production processes.

    • Human Capital: The skills and knowledge gained through education and training, enhancing worker productivity.

    • Technological Knowledge: Understanding of processes and techniques that enable the production of goods and services.

The Role of Institutions

  • Definition of Institutions: The rules and frameworks shaping economic incentives, referred to as the