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Isues in economics today 6th by guell chapter20

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


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Growth in Already Developed
Countries
• Sources of Growth
• Increases in Aggregate
Demand
• Increases in Aggregate Supply

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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
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Increasing Aggregate Demand

PI

AS

PI’

PI*
AD’
AD

RGDP*
McGraw-Hill/Irwin

RGDP’

RGDP

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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
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©2012 The McGraw-Hill Companies, All Rights Reserved

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Increases in Aggregate Supply
PI

AS
AS’

PI*
PI’
AD

RGDP*
McGraw-Hill/Irwin

RGDP’

RGDP

©2012 The McGraw-Hill Companies, All Rights Reserved

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1-7


Productivity and GDP Growth
1990-2004

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©2012 The McGraw-Hill Companies, All Rights Reserved

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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
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©2012 The McGraw-Hill Companies, All Rights Reserved

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Fostering (and Inhibiting)
Development
• Solow growth model predicted
convergence of income.
• Evidence shows this is not
occurring.
• Political and institutional
problems inhibiting growth.

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©2012 The McGraw-Hill Companies, All Rights Reserved

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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
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• 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
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©2012 The McGraw-Hill Companies, All Rights Reserved

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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
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©2012 The McGraw-Hill Companies, All Rights Reserved

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