Econ 124 Chapter 0 - Global Economic Growth and Development (blackboard).ppt - Chapter Zero Global Economic Growth and Development Why Do Some Nations

Econ 124 Chapter 0 - Global Economic Growth and Development (blackboard).ppt

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Unformatted text preview: Chapter Zero Global Economic Growth and Development: Why Do Some Nations Prosper? 1 Overview The importance and incentives of private property rights How competition leads to economic progress The importance of limiting government regulation An efficient capital market Monetary stability and inflation Why low tax rates are important for economic progress The importance of free trade 2 Per Capita Income: The last 1000 years • Income stagnated for the 800 years following year 1000, but growth has exploded during the last 200 years. $25,000 2003: $23,710 $20,000 • (Measured in 1990 dollars) world per capita income was $667 in 1820 – only about 50% higher than year 1000. By 2003, however, income had risen to $6,516 – 10 times the level of 1820. • During the past 200 years, the income growth of the high-income industrial countries (West) has been even higher – nearly 20 fold. GDP Per Capita West GDP per capita $15,000 2003: $6,516 $10,000 World GDP per capita 1820: $1,202 $5,000 1820: $667 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2003 More Recent Data… 4 Life Expectancy: The last 1000 years 80 • The pattern of the life expectancy data is similar to that of per capita income. • Life expectancy at birth for the world rose from 24 to 26 years between 1000 and 1820, but it soared to 64 by 2003. • Life expectancy in the high- income industrial countries (West) followed a similar pattern. Life Expectancy (at birth) 70 60 2003: 64 50 40 2003: 76 1820: 36 West life expectancy 30 20 10 World life expectancy 1820: 26 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2003 200 Countries in 200 Years 6 #1 The Legal System The foundation for economic progress is a legal system that protects privately owned property rights and enforces contracts in an evenhanded manner 7 #1 The Legal System Private property rights involve: 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property 8 #1 The Legal System 1. Incentive to use resources in ways that 2. 3. 4. are considered beneficial to others. Private owners have an incentive to care for and manage what they own Private owners have an incentive to conserve for the future Private owners have an incentive to make sure their property does not damage your property 9 Private Property Rights and Production Evidence from farming in the former Soviet Union Under the communist regime in the former Soviet Union, private plots made up only 2% of land under cultivation. This 2% of land produced 25% of the total agricultural output! 10 Shirking and Private Property Rights 11 Shirking and Private Property Rights 12 #1 The Legal System Even-handed enforcement of understandable and stable laws is also important for economic progress Its all about the rules of the game! 13 #2 Competitive Markets Competition promotes the efficient use of resources and provides a continuous stimulus for innovative improvements 14 #3 Limits on Government Regulation Economic progress comes through limiting government regulation that reduces trade and retards economic progress 15 #3 Limits on Government Regulation Many countries impose regulations that limit entry into various businesses and occupations 16 Where are all of the businesses? 17 World Bank Data Country Ease of Doing Business Rank # of days it takes to start a business # of procedures it takes to start a business Registering Property (Ranking) Enforcing Contracts (Ranking) GDP Per Capita (2016 PPP in US dollars) New Zealand 1 0.5 1 1 13 $37,294 Singapore 2 3 2.5 19 2 $87,855 United States 8 5.6 6 36 20 $57,436 3.66 3.03 3.16 18.66 11.66 $60,861 Haiti 181 97 12 180 123 $1,784 Republic of Congo 184 53 11 156 171 $773 Venezuela 187 144 17 129 137 $13,761 184 98.00 13.33 155 143.66 $5,439 Average Average 18 #4 An Efficient Capital Market To realize its potential, a nation must have a mechanism that channels capital into wealth creating projects. 19 #4 An Efficient Capital Market A market where people are free to invest their own money into (and or borrow money for) wealth creating projects is critical for economic growth. If government is heavily involved in making investment decisions, then this can: 1. Distort market incentives 2. Increase the importance of political rather than economic considerations 3. Make unproductive investments more likely. 20 The small rural village of Sop Chem, Lao Access to Capital: Using Microloans to Invest in Looms Having finished products for sale enhances the wealth and stature of women in the village (I bought that orange one at the end…) For 200,000 Kip (about $24)!!! Meet Jee, the first women ever elected to local office in Sop Chem! Traditionally, women are more likely to spend money on their children then men: Empowering women tends to empower families Introducing Electricity!!! #5 Monetary Policy Inflationary monetary policies distort price signals, undermining the market economy. 28 #5 Monetary Policy Money serves 3 major functions in our economy: 1. Medium of Exchange 2. Unit of Account 3. Store of Value 29 #5 Monetary Policy Inflation: When the supply of money expands rapidly compared to the supply of goods and services, the value of money declines and the general level of prices rise. 30 #5 Monetary Policy 31 Hyperinflation in Germany 32 Hyperinflation in Germany 33 Hyperinflation in Germany 34 Hyperinflation in Zimbabwe 35 Hyperinflation in Zimbabwe 36 Hyperinflation in Zimbabwe 37 Hyperinflation in Zimbabwe 38 Hyperinflation in Zimbabwe 39 #5 Monetary Policy High and variable inflation cause 3 main problems: 1. Reduces investment 2. Distorts the information delivered by prices 3. Results in less productive use of resources 40 #6 (Relatively) Low Tax Rates A. High taxes discourage work effort and reduce the productivity of labor. B. High tax rates will reduce both the level and efficiency of capital formation C. High marginal tax rates encourage individuals to spend resources figuring out how to hide their money from the government, rather than producing. 41 #7 Free Trade A nation progresses by selling goods and services that it can produce at a relatively low cost and buying those that would be costly to produce (The Law of Comparative Advantage). 42 Economic Freedom! Economic Freedom consists of: 1. Secure private property rights and even handed enforcement of contracts 2. Minimal government regulation 3. Market versus government allocation of capital 4. Stable monetary environment 5. Low marginal tax rates 6. Minimal barriers to trade 43 Economic Freedom! How important is economic freedom for economic growth? It matters more than anything else! 44 Economic Freedom! 45 North Korea vs. South Korea Per Capita Income = $1,300 Per Capita Income = $35,790 46 Economic Freedom! Lets take a tour of the world and look at countries with various levels of economic freedom! 47 A country with very low economic freedom: Zimbabwe (in Africa) 48 Life in Zimbabwe (Africa) Per Capita GDP: $1,688 49 Life in Zimbabwe (Africa) Per Capita GDP: $1,688 50 A country with low economic freedom: Tanzania (in Africa) 51 Life in Tanzania (Africa) Per Capita Income: $2,510 52 Life in Tanzania (Africa) Per Capita Income: $2,510 53 Life in Tanzania (Africa) Per Capita Income: $2,510 54 Life in Tanzania (Africa) Per Capita Income: $2,510 55 Life in Tanzania (Africa) Per Capita Income: $2,510 56 Life in Tanzania (Africa) Per Capita Income: $2,510 57 A country with medium economic freedom: Peru (South America) 58 Life in Peru (South America) Per Capita Income: $11,672 59 Life in Peru (South America) Per Capita Income: $11,672 60 Life in Peru (South America) Per Capita Income: $11,672 61 Life in Peru (South America) Per Capita Income: $11,672 62 Life in Peru (South America) Per Capita Income: $11,672 63 A country with fairly high economic freedom: Romania (in Europe) 64 Life in Romania (Europe) Per Capita Income: $19,925 65 Life in Romania (Europe) Per Capita Income: $19,925 66 Life in Romania (Europe) Per Capita Income: $19,925 67 Life in Romania (Europe) Per Capita Income: $19,925 68 Life in Romania (Europe) Per Capita Income: $19,925 69 Life in Romania (Europe) Per Capita Income: $19,925 70 A country with very high levels of economic freedom: Hong Kong (in Asia) 71 Life in Hong Kong Per Capita Income: $53,380 72 Life in Hong Kong Per Capita Income: $53,380 73 Life in Hong Kong Per Capita Income: $53,380 74 Economic Freedom! 75 Review Know the seven major sources of economic progress 1. The Legal System: private property rights and evenhanded enforcement of stable laws 2. Competitive Markets 3. Limits on Government Regulation 4. An Efficient Capital Market 5. Stable Monetary Policy 6. Low Tax Rates 7. Free Trade Understand the importance of Economic Freedom 76 ...
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