Chapter 16
Creating an Environment for Growth and Prosperity
OUTLINE
I. History of Economic Growth
A. Per Capita Income: The Last 1000 years
1. Income stagnated for the 800 years following year 1000, but growth has exploded
during the last 200 years.
B. Life expectancy: The last 1000 years
2. Life expectancy at birth for the world rose from 24 to 26 years between 1000 and
1820, but it soared to 64 by 2003.
3. Life expectancy in the high-income industrial countries followed a similar pattern
II. Economic Growth, Production Possibilities, and the Quality of Life
A. Economic growth expands the productive capacity of an economy.
B. Differences in sustained growth rates over two or three decades will substantially alter
the relative incomes of countries.
C.
of years required for an income level to double
III. Key Sources of Economic Growth and High Incomes
A. Gains from Trade
B. Entrepreneurship, Technology, and the Discovery of Better Ways of Doing Things
IV. What Institutions and Policies Will Promote Growth
A. Legal System: Secure Property Rights, Rule of Law, and Even-Handed Enforcement of
Contracts
B. Competitive Markets
C. Stable Money and Prices
D. Minimal Regulation
E. The Avoidance of High Taxes
F. Trade Openness
G. Other Factors That May Influence Growth and Income
3. Foreign Aid
H. Institutions, Policies, and Prosperity
1. Institutions and policies matter because they shape incentives and thereby
2. When institutions and policies provide secure property rights, a fair and balanced
3. When the legal and regulatory environment fails to protect property rights and
4. Unless countries adopt institutions and policies supportive of trade,
OBJECTIVES
Over time, growth rates are crucial to economic well-being, and we do know a few things about
conditions that promote growth and factors that are obstacles to growth. Investment in human and
physical capital, technological progress, and efficient economic organization are important
determinants of growth. Institutional arrangements that encourage investment, technological
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Review with students the data of Exhibit 2. This exhibit highlights the impact of long-term
differences in growth rates.
2. Discuss the significance of each of the following as a source of economic growth:
a. investment in human capital
3. Indicate how each of the following aids the growth of income:
a. secure private property rights, and even-handed enforcement of contracts
4. The connection between marginal tax rates and growth provides material for an interesting
class discussion. Ask students to consider why high marginal tax rates might cause a nation to
5. Review the non-institutional factors that are often thought to influence growth:
a. Growth of the Population
6. Question 14 is a topic suitable for assignment as a short research paper. The other Critical
7. Additional topics to discuss with students:
a. What type(s) of investment in human capital would be most likely to promote the
development of poor nations?
b. Do trade restrictions help or hinder the development of poor counties?
c. What measures might less-developed nations take in order to attract additional private
capital formation?
8. One way to help students to visualize the importance of incentives to growth and development,
and especially the ability of moving toward free markets to accelerate both, is to have them
9. An interesting classroom discussion topic for this chapter is to ask students whether children
10. Foreign aid as a weapon to encourage economic growth is an interesting topic to discuss in
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
1. Even seemingly small differences in growth rates sustained over two or three decades will
substantially alter relative incomes. For example, if Country A and Country B have the same
5. Competition is important because it encourages producers to supply goods that consumers
10. Resources clearly give some nations an advantage. For example, oil-rich countries like Saudi
Arabia, Bahrain, and the United Arab Emirates have substantially higher per capita incomes
14. As Exhibit 4 of this chapter indicates, economic growth is primarily about gains from trade,
discovery of new products and lower cost production methods, and investment in physical
and human capital. Institutions and policies that promote gains from these sources are the key
to growth and prosperity. The following are particularly important: