Chapter 20 Economic Growth and Development McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Outline • Growth in Already Developed Countries • Comparing Developed Countries and Developing Countries • Fostering (and Inhibiting) Development McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-2 1-2 Growth in Already Developed Countries • Sources of Growth • Increases in Aggregate Demand • Increases in Aggregate Supply McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-3 1-3 Aggregate Demand • Variables to Shift Aggregate Demand • Low interest rates • Low taxes • High government spending • Government can not make this occur continuously • Eventually, the Classical Range of the Aggregate Supply curve will be reached McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-4 1-4 Increasing Aggregate Demand PI AS PI’ PI* AD’ AD RGDP* McGraw-Hill/Irwin RGDP’ RGDP ©2012 The McGraw-Hill Companies, All Rights Reserved 20-5 1-5 Aggregate Supply • Variables that can shift Aggregate Supply • Wage and Input Costs • Productivity • Technology • Wage and Input costs can’t continuously decrease • Productivity and Technology can continually increase McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-6 1-6 Increases in Aggregate Supply PI AS AS’ PI* PI’ AD RGDP* McGraw-Hill/Irwin RGDP’ RGDP ©2012 The McGraw-Hill Companies, All Rights Reserved 20-7 1-7 Productivity and GDP Growth 1990-2004 McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-8 1-8 Comparing Developed Countries and Developing Countries • Rich Countries • Are getting richer (faster GDP growth) • Have more evenly divided incomes (lower GINI coefficients) • GDP is produced by services, then industry (agriculture insignificant) • Lower Inflation • Poor Countries • • • • Have lower GDP growth rates Have highly uneven incomes Agriculture is an important part of GDP Have higher levels of inflation McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-9 1-9 Fostering (and Inhibiting) Development • Solow growth model predicted convergence of income • Evidence shows this is not occurring • Political and institutional problems inhibiting growth McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-10 1-10 The Challenges Facing Developing Countries • • • • • Low Rates of Basic Literacy Lack of Infrastructure Political Instability Corruption Lack of Independent Central Banking • Inability to Repatriate Profits • A Need to Focus on the Basics McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-11 1-11 • Japan Success Stories • Solid financial institutions • Education • Few Resources • China • Resources • Cheap labor • South Korea • Liberalized political institutions • Solid financial institutions • Saudi Arabia & Kuwait • Oil McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-12 1-12 What Works • Basic Building Blocks • education • a low or manageable level of government corruption • a level of political and financial stability • Creates confidence among foreign investors McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 20-13 1-13 ...Chapter Outline • Growth in Already Developed Countries • Comparing Developed Countries and Developing Countries • Fostering (and Inhibiting) Development McGraw-Hill/Irwin ©2012 The McGraw-Hill... The Challenges Facing Developing Countries • • • • • Low Rates of Basic Literacy Lack of Infrastructure Political Instability Corruption Lack of Independent Central Banking • Inability to Repatriate... Supply • Wage and Input Costs • Productivity • Technology • Wage and Input costs can’t continuously decrease • Productivity and Technology can continually increase McGraw-Hill/Irwin ©2012 The McGraw-Hill