Deck 16: Creating an Environment for Growth and Prosperity

Question 1

How does economic growth influence the living standards of people? Does it really make much difference whether an economy grows at 2 percent or 4 percent annually? Discuss.

Answer 1

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population.
The rule of 70 states that, if a variable grows at a % per year, it will take
years to grow as double. This calculation tells us that even a small difference in the growth rate can put an economy in more advance stage in a given time. Thus, two economies with growth rate 2% and 4% will double its per capita income in 35 years and 17.5 years respectively. Therefore, we see that a mere difference of 2% helps one economy to double its income half the time faster than another.

Question 2

Indicate in your own words why trade, entrepreneurial discovery, and investment are important sources of economic growth and achievement of high income levels.

Answer 2

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population.
There are three major sources of economic growth they are:
1. The gains from trade : Trade helps the economy to specialize in what they produce more efficiently and allow them to sell it to the customers who valued them most. This ensures lower cost of production and higher profit margins. Trade also enables the economy to consume beyond its productive capacity. Hence, trade increases country's income and ensures faster growth.
2. Entrepreneurship : The discovery and adoption of new technology and methods reflects technical advancement. The discovery and adoption of new technology or method needs huge investment and involves certain risk of failure. If the country has many entrepreneurs who are willing to take risks, the country will innovate and new techniques and methods will be invented. These new technique will make production more efficient. This means the same amount of input will now produce higher amount of output and growth will be sustained.
3. Investment : The investment both in physical and human capital is a major source of economic growth. The country that invest more in both of these capital experience higher rate of growth. This is because the investment increases the productive capacity of each input and greater output can be produce by the same input. The total product of the country increases and so does the income.

Question 3

*"Without aid from industrial nations, poor countries are caught in a poverty trap. Because they are poor, they are unable to save and invest; and, lacking investment, they remain poor." Evaluate this view.

Answer 3

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population.
The investment both in physical and human capital is a major source of economic growth. The country higher rate of investment in these two capitals; experience higher rate of growth than the country which did not. This is because the investment increases the productive capacity of each input and greater output can be produce by the same input. The total product of the country increases and so does the income.
Thus, higher investment provides foundation for economic growth. The lower income country without the initial aid from the high income counterpart cannot provide this investment. Thus, foreign aid is necessary for these countries.
However, the study have shown that the foreign aid was largely ineffective and in marginal cases proven detrimental to the poor economy. Many large countries often dump their agricultural excess into the poor countries in the name of aid. This distorts the market for agriculture in these countries and retard growth. On the other hand, as the political consideration drive the aid, it seldom transferred into investment in capital. Hence, foreign aid is still an area of debate as whether it can provide economic growth or not.

Question 4

What happened to economic growth between 1000 and 1800? How did the situation change after 1800? Why were these two periods so dramatically different? Discuss.

Question 5

Why is competition important for the efficient use of resources? What must a firm do in order to compete effectively? Competitive forces often result in firms being driven out of business. How does this "business failure" influence the growth of income?

Question 6

"Regulatory policies that restrict trade and voluntary agreements between parties will retard economic progress." Indicate why you either agree or disagree with this statement.

Question 7

What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure? How important is innovation as a source of economic growth? Discuss.

Question 8

*"Because government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises." Evaluate this view.

Question 9

How does money of stable value influence the volume of trade? When the inflation rate is volatile, how is the volume of trade affected? How will this influence the income levels of people?

Question 10

What impact do natural resources have on economic growth? Will it be possible for a country with few natural resources to grow rapidly? Why or why not?

Question 11

Why did Thomas Malthus believe that per person income could never rise much above the subsistence level? Given the era of his writings, was Malthus's view on this topic surprising? Why or why not?

Question 12

*The diversity of goods available to consumers today is much greater than in the past. How does this influence consumer welfare? Do the GDP growth figures capture the impact of the increased diversity? Why or why not?

Question 13

*When the government is heavily involved in the regulation of markets, how will this influence the gains from trade? How will it influence the degree of rent-seeking by business and labor groups and the campaign contributions available to politicians?

Question 14

Suppose that you have just been appointed to a high-level position in the economic analysis unit of the State Department. The secretary of state has asked you to prepare a memo describing the key policies and economic arrangements that less-developed countries should follow in order to achieve rapid growth and high income levels. Briefly describe your response. Be sure to indicate why each factor you mention is important if a nation is going to attain a high level of economic progress.