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Economic Growth and Development

Chapter 20. Economic Growth and Development. Chapter Outline. Growth in Already Developed Countries Comparing Developed Countries and Developing Countries Fostering (and Inhibiting) Development. Growth in Already Developed Countries. Sources of Growth Increases in Aggregate Demand

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Economic Growth and Development

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  1. Chapter 20 Economic Growth and Development

  2. Chapter Outline • Growth in Already Developed Countries • Comparing Developed Countries and Developing Countries • Fostering (and Inhibiting) Development

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

  4. 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

  5. PI AS PI’ PI* AD’ AD RGDP* RGDP’ RGDP Increasing Aggregate Demand

  6. 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

  7. PI AS AS’ PI* PI’ AD RGDP RGDP* RGDP’ Increases in Aggregate Supply

  8. Productivity and GDP Growth1990-2004

  9. 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

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

  11. 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

  12. Success Stories • Japan • Solid financial institutions • Education • Few Resources • China • Resources • Cheap labor • South Korea • Liberalized political institutions • Solid financial institutions • Saudi Arabia & Kuwait • Oil

  13. 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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