Ten Principles of Economics - Part 54

CHAPTER 24 PRODUCTION AND GROWTH 549 higher trade barriers; excessive tax better contained if the West were willing government spending of 20 percent of rates; lower saving rates; and adverse structural conditions, including an unusu-ally high incidence of inaccessibility to the sea (15 of 53 countries are land-locked). . . . If the policies are largely to blame, why, then, were they adopted? The his-torical origins of Africa’s antimarket ori-entation are not hard to discern. After almost a century of colonial depreda-tions, African nations understandably if erroneously viewed open trade and for- eign capital as a threat to national sover- to provide modest support to African-based peacekeeping efforts. “Easy taxes” are well within the ambit of the IMF and World Bank. But here, the IMF stands guilty of neglect, if not malfeasance. African nations need simple, low taxes, with modest revenue targets as a share of GDP. Easy taxes are most essential in international trade, since successful growth will depend, more than anything else, on economic integration with the rest of the world. Africa’s largely self-imposed exile from GDP or less (China gets by with just 13 percent). Education can usefully absorb around 5 percent of GDP; health, an-other 3 percent; public administration, 2 percent; the army and police, 3 per-cent. Government investment spending can be held to 5 percent of GDP but only if the private sector is invited to pro-vide infrastructure in telecommunica-tions, port facilities, and power. . . . This fiscal agenda excludes many popular areas for government spending. There is little room for transfers or social eignty. As in Sukarno’s Indonesia, world markets can end quickly by cutting spending beyond education and health Nehru’s India, and Peron’s Argentina, “self sufficiency” and “state leader-ship,” including state ownership of much of industry, became the guideposts of the economy. As a result, most of Africa went into a largely self-imposed eco- nomic exile. . . . import tariffs and ending export taxes on agricultural exports. Corporate tax rates should be cut from rates of 40 percent and higher now prevalent in Africa, to rates between 20 percent and 30 per-cent, as in the outward-oriented East Asian economies. . . . (though on my proposals, these would get a hefty 8 percent of GDP). Subsidies to publicly owned companies or market-ing boards should be scrapped. Food and housing subsidies for urban workers cannot be financed. And, notably, inter- est payments on foreign debt are not Adam Smith in 1755 famously Adam Smith spoke of a “tolerable” budgeted for. This is because most remarked that “little else is requisite to carry a state to the highest degrees of opulence from the lowest barbarism, but administration of justice, not perfect jus-tice. Market liberalization is the primary key to strengthening the rule of law. Free bankrupt African states need a fresh start based on deep debt-reduction, which should be implemented in con- peace, easy taxes, and tolerable admin- trade, currency convertibility and auto- junction with far-reaching domestic istration of justice.” A growth agenda need not be long and complex. Take his points in turn. Peace, of course, is not so easily guaranteed, but the conditions for peace on the continent are better than today’s ghastly headlines would suggest. Sev-eral of the large-scale conflicts that have ravaged the continent are over or nearly so. . . . The ongoing disasters, such as in Liberia, Rwanda and Somalia, would be matic incorporation of business vastly reduce the scope for official corruption and allow the government to focus on the real public goods—internal public order, the judicial system, basic pub-lic health and education, and monetary stability. . . . All of this is possible only if the gov-ernment itself has held its own spending to the necessary minimum. The Asian economies show how to function with reforms. Source: Economist, June 29, 1996, pp. 19–21. especially important for technological progress. There is no doubt that these issues are among the most important in economics. The success of one generation’s poli-cymakers in learning and heeding the fundamental lessons about economic growth determines what kind of world the next generation will inherit. 550 PART NINE THE REAL ECONOMY IN THE LONG RUN Summary Economic prosperity, as measured by GDP per person, varies substantially around the world. The average income in the world’s richest countries is more than ten times that in the world’s poorest countries. Because growth rates of real GDP also vary substantially, the relative positions of countries can change dramatically over time. The standard of living in an economy depends on the economy’s ability to produce goods and services. Productivity, in turn, depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers. Government policies can influence the economy’s growth rate in many ways: encouraging saving and investment, encouraging investment from abroad, fostering education, maintaining property rights and political stability, allowing free trade, controlling population growth, and promoting the research and development of new technologies. The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. Because of diminishing returns, higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy approaches a higher level of capital, productivity, and income. Also because of diminishing returns, the return to capital is especially high in poor countries. Other things equal, these countries can grow faster because of the catch-up effect. Key Concepts productivity, p. 533 physical capital, p. 534 human capital, p. 534 natural resources, p. 534 catch-up effect, p. 539 technological knowledge, p. 535 diminishing returns, p. 539 Questions for Review 1. What does the level of a nation’s GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate, or in a nation with a low level and a high growth rate? 2. List and describe four determinants of productivity. 3. In what way is a college degree a form of capital? 4. Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving? 5. Does a higher rate of saving lead to higher growth temporarily or indefinitely? 6. Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth? 7. How does the rate of population growth influence the level of GDP per person? 8. Describe two ways in which the U.S. government tries to encourage advances in technological knowledge. Problems and Applications 1. Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itself. Can you reconcile these two facts? 2. List the capital inputs necessary to produce each of the following: a. cars b. high school educations c. plane travel d. fruits and vegetables CHAPTER 24 PRODUCTION AND GROWTH 551 3. U.S. income per person today is roughly eight times what it was a century ago. Many other countries have also experienced significant growth over that period. What are some specific ways in which your standard of living differs from that of your great-grandparents? 4. The chapter discusses how employment has declined relative to output in the farm sector. Can you think of another sector of the economy where the same phenomenon has occurred more recently? Would you consider the change in employment in this sector to represent a success or a failure from the standpoint of society as a whole? 5. Suppose that society decided to reduce consumption and increase investment. a. How would this change affect economic growth? b. What groups in society would benefit from this change? What groups might be hurt? 6. Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending. a. Describe some forms of private spending that represent consumption, and some forms that represent investment. b. Describe some forms of government spending that represent consumption, and some forms that represent investment. 7. What is the opportunity cost of investing in capital? Do you think a country can “over-invest” in capital? What is the opportunity cost of investing in human capital? Do you think a country can “over-invest” in human capital? Explain. 8. Suppose that an auto company owned entirely by German citizens opens a new factory in South Carolina. a. What sort of foreign investment would this represent? b. What would be the effect of this investment on U.S. GDP? Would the effect on U.S. GNP be larger or smaller? 9. In the 1980s Japanese investors made significant direct and portfolio investments in the United States. At the time, many Americans were unhappy that this investment was occurring. a. In what way was it better for the United States to receive this Japanese investment than not to receive it? b. In what way would it have been better still for Americans to have done this investment? 10. In the countries of South Asia in 1992, only 56 young women were enrolled in secondary school for every 100 young men. Describe several ways in which greater educational opportunities for young women could lead to faster economic growth in these countries. 11. International data show a positive correlation between political stability and economic growth. a. Through what mechanism could political stability lead to strong economic growth? b. Through what mechanism could strong economic growth lead to political stability? IN THIS CHAPTER YOU WILL . . . Learn about some of the important financial institutions in the U.S. economy Consider how the financial system is related to key macroeconomic variables Develop a model of the supply and demand for loanable funds in financial S A V I N G , I N V E S T M E N T , A N D markets T H E F I N A N C I A L S Y S T E M Imagine that you have just graduated from college (with a degree in economics, of course) and you decide to start your own business—an economic forecasting firm. Before you make any money selling your forecasts, you have to incur substantial costs to set up your business. You have to buy computers with which to make your forecasts, as well as desks, chairs, and filing cabinets to furnish your new office. Each of these items is a type of capital that your firm will use to produce and sell its services. How do you obtain the funds to invest in these capital goods? Perhaps you are able to pay for them out of your past savings. More likely, however, like most en-trepreneurs, you do not have enough money of your own to finance the start of your business. As a result, you have to get the money you need from other sources. Use the loanable-funds model to analyze various government policies Consider how government budget deficits affect the U.S. economy 553 ... - tailieumienphi.vn