20
ECONOMIC GROWTH AND DEVELOPMENT
_______________________________________________________________________
CHAPTER OUTLINE
Growth in Already Developed Countries
Comparing Developed Countries and Developing Countries
Fostering (and Inhibiting) Development
Summary
LEARNING OBJECTIVES
LO1: Identify why some already developed countries grow faster than others.
LO2: Explain why creating an environment for economic growth in a developing country is a very different and
much harder challenge than fostering growth in an already developed country.
LO3: List what legal, political, and institutional factors have historically limited growth in many developing
countries.
KEY TERMS
Gini Index- A measure of overall income disparity.
Purchasing power parity- Using the cost of a similar market basket of goods across countries to compare an
economic variable like gross national income.
DISCUSSION PROBLEMS
1. Which topics in this book are used to examine the economic growth and development of entire
countries?
2. What two factors must be present for an already developed country to grow?
3. What can government do to increase aggregate demand?
4. What circumstances might prevent an economy from growing even if aggregate supply is
increasing?
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Chapter 20
5. What is the usual determinant of economic growth in developed countries?
6. What fosters increase in aggregate supply?
7. What factor can increase aggregate supply without limit?
8. What two factors foster increases in worker productivity?
9. What is a Gini index and what does it mean?
10. What is purchasing power parity?
11. What is the central prediction of the Solow Growth model?
12. Why don’t the poorer countries grow faster than the richer ones, leading to fulfillment of the central
prediction of the Solow Growth model?
13. What are repatriated profits?
14. What does nationalization of assets mean?
15. Why is an independent central bank important to developing countries?
16. What two East Asia countries have grown at a rather brisk pace during the past decade?
17. What are the basic building blocks for growing the economy of a poor country?
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309
THE WEB-BASED QUESTION
Part I.
Go to the website of the World Bank below, view the Overview of the Global Monitoring Report, 2008, and
answer the questions below.
http://siteresources.worldbank.org/INTGLOMONREP2008/Resources/47379941207342962709/8944_Web_PDF.pdf
1. What are the eight Millennium Development Goals of the World Bank?
2. Overall, how are countries faring in achieving these eight goals?
3. What link does the 2008 report highlight and what does the report conclude about this link?
Part II.
Go to the CIA’s 2007 World Factbook web page and fill in the data for the table below using the rank order
pages. Follow the References – Guide to Countries Comparisons tabs.
https://www.cia.gov/library/publications/the-world-factbook
ITEM
Lowest Ranking
Country/Amount
United States
Amount
Death Rate
(per 1000
population)
Infant Mortality
Rate
(per 1000 live
births)
Life Expectancy
Rate
(years)
Unemployment Rate
(%)
Inflation Rate
(%)
GDP Per Capita
(U.S. Dollars)
GDP Real Growth
Rate
(%)
Military
Expenditures
(percent of GDP)
In what categories is the United States doing well? Not so well?
World
Amount
Highest Ranking
Country/Amount
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Chapter 20
ANSWERS TO STUDY QUESTIONS
DISCUSSION PROBLEMS
1. The study of economic growth and development draws upon (a) macroeconomics, (b) international trade,
and (c) government policy. It also uses a little bit of guesswork, but, of course, this topic has not already
been discussed in this book.
2. For a developed economy to grow, it needs two things: (a) sustained increases in aggregate demand and
(b) a simultaneous sustained increase in aggregate supply.
3. Government can stimulate aggregate demand using fiscal (government spending and/or taxes) or
monetary (money supply) policy.
4. Aggregate demand might not also increase due to deflationary pressures that diminish people’s
willingness to buy big-ticket items.
5. Increases in aggregate supply ultimately come from increases in worker productivity.
6. Decreases in government regulation, decreases in input prices, and increases in worker productivity
(education, tools, and technology) foster increases in aggregate supply.
7. Worker productivity can increase without limit, thereby increasing aggregate supply without limit.
8. Worker productivity is fostered by government policies that contribute to long-term capital formation and
worker education and training.
9. The Gini index is a measure of overall income disparity. It is generally higher in poorer countries than
richer.
10. Purchasing power parity is the practice of using the cost of a similar market basket of goods within
different countries to compare macroeconomic variables, such as Gross Domestic Product.
11. The central prediction of the Solow Growth model is that the levels of economic development of the
countries of the world should converge over time. That is, poorer countries should grow faster than richer
ones to the point where their per capita real GDP would not differ that much.
12. Poorer countries do not grow faster than richer ones because they have so many obstacles that prevent
them from doing so. These obstacles include (a) low rates of basic literacy, (b) lack of infrastructure, (c)
political instability, (d) corruption, (e) lack of independent central banking, (f) inability to repatriate
profits, and (g) the need to focus on the very basic necessities of life.
13. Repatriated profits are profits earned by a foreigner within a country that are converted into a hard
currency (dollar, Euro, etc.) and exported out of that country.
14. An independent central bank is important to developing countries because without one, the country’s
ruler(s) can print money to build palaces for themselves or pay soldiers for protection.
15. Assets are nationalized when a government confiscates or forcibly takes ownership of foreigners’ assets.
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311
16. China and South Korea have experienced vigorous growth during the past decade.
17. The basic building blocks for growing a poor country’s economy are (a) education, (b) low or manageable
level of government corruption, and (c) a level of political and financial stability that creates confidence
among foreign investors.
SUGGESTED ANSWERS TO WEB-BASED QUESTIONS
Part I.
1. The eight MDGs are reducing poverty and hunger, educating all children, empowering women, saving
children, caring for mothers, combating disease, using resources wisely, and working together.
2. Overall, most countries will fall short of these goals. Prospects are gravest for the goals of reducing child
and maternal mortality. Serious shortfalls also are likely in primary school completion, nutrition, and
sanitation goals.
3. The report stresses the link between environment and development, and calls for urgent action on climate
change.
Part II.
ITEM
Death Rate
(per 1000
population)
Infant Mortality
Rate
(per 1000 live
births)
Life Expectancy
Rate
(years)
Unemployment Rate
(%)
Inflation Rate
(%)
GDP Per Capita
(U.S. Dollars)
GDP Real Growth
Rate
(%)
Military
Expenditures
(percent of GDP)
Lowest Ranking
Country/Amount
United Arab Emirates
2.11
United States
Amount
8.38
World
Amount
8.20
Highest Ranking
Country/Amount
Swaziland
30.83
Singapore
2.31
6.26
40.85
Angola
180.21
Swaziland
31.88
78.11
66.57
Macau
84.36
Andorro (and others)
0.0
San Marino
-3.5%
Zimbabwe
$200
Zimbabwe
-12.6
7.2
30
4.2
N.A.
$47,000
$10,400
1.3
3.8
Nauru
90
Zimbabwe
11.2 million
Liechtenstein
$118,000
Macau
15
4.06
2.0
Iceland
0.0
Oman
11.4
The United States appears do be doing well in every category except GDP real growth and military
expenditures as a percent of GDP.