Macro Chapter 16
Creating an Environment for
Growth and Prosperity
3 Learning Goals
1) Explain the relationship between output
and income
2) Identify the general sources of economic
growth
3) Identify specific institutional factors that
promote economic growth
2 major issues in macroeconomics:
1. Growth
2. Short run fluctuations
History of Economic
Growth
Steady economic growth is
desirable because:
(1) Output growth means more goods and
services per person
(2) Output growth leads to income growth
(3) People will make better decisions than
if faced with highly variable changes
(4) More people will be employed
Here’s the possible impact of just slightly
reducing our long-run growth rate:
If we grow at an average annual rate of
3%, national income will double about
every 23 years.
If we only grow at an average of 2.5%,
national income will double about every 28
years.
If we grow at an average of 3.5%, national
income will double about every 20 years.
Here’s the possible impact of just slightly
reducing our long-run growth rate:
Starting with 2011 GDP of $15.2 trillion, if
we grow at an average annual rate of 3%
GDP will grow by about $79 trillion in your
lifetime.
If we only grow at an average of 2.5%,
GDP will grow by about $55 trillion; $24
trillion less
If we only grow at an average of 2%, GDP
will grow by about $36 trillion; $43 trillion
less
Economic Growth,
Production Possibilities,
and the Quality of Life
Watch video: Hans Rosling 200 Countries
200 Years
Sources of Economic
Growth and High
Incomes
Q16.1 Which of the following is least likely to help
the residents of a nation produce more goods and
services and achieve higher income levels?
1.
2.
3.
4.
higher tax rates
a lower rate of investment
a smaller trade sector
greater use of taxation to transfer income from
the rich to the poor
Watch video: Stossel Macro 09- economic
freedom and prosperity
Q16.2 Which of the following is most likely to help
the residents of a nation produce more goods and
services and achieve higher income levels?
1.
2.
3.
4.
lower tax rates
a higher rate of investment
a larger trade sector
less use of taxation to transfer income from the
rich to the poor
4 key sources of growth:
1) Gains from trade
See gains from trade from Chapter 1remember the trading game in class?
Value is created through voluntary trade
See comparative advantage from Chapter
2- each country should make the
good/service for which they have a low
opportunity cost
2) Entrepreneurship and
technology
Joseph Schumpeter’s “creative
destruction”
3) Investment in physical and
human capital
Physical capital = machines, equipment,
and buildings
Human capital = knowledge and skills
A tradeoff exists between consumption
and investment
Ceteris paribus, those countries who
reduce consumption to increase
investment grow faster
4) Institutions
Institutions = “rules of the game” or the
policies and regulations that govern
behavior
Institutions can be both the official laws
and societal norms
Q16.3 When individuals and businesses are
permitted to trade freely over a larger market area,
1. wages will decline to the level of the poorest
country in the region.
2. the monopoly power of business firms will
increase.
3. they will be able to produce a larger output and
consume a more diverse bundle of goods.
4. businesses will be able to earn higher profits,
but the income levels of individuals will decline.
Q16.4 Which of the following is a driving force
underlying economic growth?
1. trade restrictions that protect domestic businesses from
competition with foreign producers
2. regulations that require businesses to obtain
permission from the government before starting a new
business
3. tax increases that expand the revenues of the
government
4. entrepreneurial discovery and production of improved
products
What Institutions and
Policies Will Promote
Growth?
See Thumbnail Sketch on p. 327
Key institutions:
1)
2)
3)
4)
5)
6)
Secure property rights and political stability
Competitive markets
Stable money and prices
Minimal regulation
Relatively low marginal tax rates
Trade openness
Let’s see these in action
Watch video: Stossel Macro 10institutions, growth, freedom
Watch video: Stossel MECA- why do
nations prosper?
Q16.5 A legal system that protects private property and
enforces contracts in an even-handed manner helps
promote economic growth because it
1. makes it possible for individuals to generate large
incomes and get ahead without cooperating with others.
2. provides people with a strong incentive to supply others
with things that they value at an economical price.
3. encourages people to use resources now rather than
conserving them for the future.
4. keeps the real wages of workers low and thereby makes
it possible for business firms to supply goods and
services economically.
Q16.6 When the residents of a nation are free to
trade with foreigners, domestic producers will be
able to
1. export more goods for which they are a highcost supplier.
2. supply a larger quantity of goods they can
produce at a relatively low cost.
3. charge higher prices then would otherwise be
the case.
4. survive in the marketplace even if they do not
produce efficiently.
Question Answers
16.1 = any (survey)
16.2 = any (survey)
16.3 = 3
16.4 = 4
16.5 = 2
16.6 = 2