Week 5 - 30/9/2024
1
CHAPTER 27
The Wealth of Nations and Economic Growth
– Infant health and wealth are positively correlated
– Around 70% of the world live in countries with GDP per capita less
than the average
– In the past everyone was poor (700-1000 dollars per year)
– Economic growth = growth rate of real GDP per capita
– Rule of 70: If the annual growth rate of a variable is x %, then the
doubling time is 70/x years
FACTORS OF PRODUCTION:
Cause of wealth of nations - countries with a high GDP per capita have a lot of
4
physical and human capital per worker that is highly organised using the best
technological knowledge to be highly productive (= factors of production)
3 . (Physical) capital = the stock of tools including machines, structures,
and equipment.
– tools in the broadest sense (e.g. computers, desks, tractors,
cell phones etc)
2 . Human capital = the productive knowledge and skills that workers
acquire through education, training, and experience.
– the stuff in people’s heads that makes them productive.
– Increased through education
1 . Technological knowledge is knowledge about how the world works that
is used to produce goods and services.
– Increased through research and development
. Organisation -> all of these factors must be organised well to produce
goods and services
INCENTIVES AND INSTITUTIONS
Poorer countries not only have less physical and human capital but also fail to
organise it in the most productive ways
Countries with a high GDP per capita have institutions that make it in people’s
self-interest to invest in physical capital, human capital, and technological
knowledge and to efficiently organize these resources for production.
Institutions include laws and regulations but also customs, practices,
organizations, and social mores
– The “rules of the game” that shape human interaction and
structure economic incentives within a society
. PROPERTY RIGHTS
, – Constructs in economics for determining how a resource or
economic good is used and owned
– Communal property = incentives to invest in land and work were
low (more incentives to not work and free ride)
– Free rider = someone who consumes a resource without working or
contributing to the resource’s upkeep.
– Important institutions because the encourage investment in
physical and human capital (savers won’t save and investors won’t
invest they their property isn’t secure and they will receive a
return)
– Also important for encouraging technological innovation
. HONEST GOVERNMENT
– E.g. private property exists in countries like Venezuela on paper,
but the government can take these goods at any moment -> it
lacks the rule of law (not honest government)
– An honest government is one that spends taxpayer funds on public
goods like education, infrastructure, and public health -> increases
productivity
– Corruption makes it less profitable to be an entrepreneur and more
profitable to be a corrupt politician
. POLITICAL STABILITY
– In many nations, civil war, military dictatorship, and anarchy have
destroyed the institutions necessary for economic growth
. A DEPENDABLE LEGAL SYSTEM
– In certain countries, the legal system is such low quality that no
one knows who owns it -> poorly protected property rights
– A good legal system facilitates contracts and protects private
parties from expropriating one another
. COMPETITIVE AND OPEN MARKETS
– The failure to organise capital effectively has a huge effect on the
wealth of nations
– e.g. India has many inefficient and unnecessary regulations which
create monopolies or impede markets
– Free trade opens a country up to new ideas - but also depends on
natural conditions
CHAPTER 29
Saving, Investment, and the Financial System
The collapse of the Lehman bank was the beginning for the recession of
2008-2009
Credit dried up for firms in many sectors since no one wanted to lend money to
a firm that might soon go bankrupt
1
CHAPTER 27
The Wealth of Nations and Economic Growth
– Infant health and wealth are positively correlated
– Around 70% of the world live in countries with GDP per capita less
than the average
– In the past everyone was poor (700-1000 dollars per year)
– Economic growth = growth rate of real GDP per capita
– Rule of 70: If the annual growth rate of a variable is x %, then the
doubling time is 70/x years
FACTORS OF PRODUCTION:
Cause of wealth of nations - countries with a high GDP per capita have a lot of
4
physical and human capital per worker that is highly organised using the best
technological knowledge to be highly productive (= factors of production)
3 . (Physical) capital = the stock of tools including machines, structures,
and equipment.
– tools in the broadest sense (e.g. computers, desks, tractors,
cell phones etc)
2 . Human capital = the productive knowledge and skills that workers
acquire through education, training, and experience.
– the stuff in people’s heads that makes them productive.
– Increased through education
1 . Technological knowledge is knowledge about how the world works that
is used to produce goods and services.
– Increased through research and development
. Organisation -> all of these factors must be organised well to produce
goods and services
INCENTIVES AND INSTITUTIONS
Poorer countries not only have less physical and human capital but also fail to
organise it in the most productive ways
Countries with a high GDP per capita have institutions that make it in people’s
self-interest to invest in physical capital, human capital, and technological
knowledge and to efficiently organize these resources for production.
Institutions include laws and regulations but also customs, practices,
organizations, and social mores
– The “rules of the game” that shape human interaction and
structure economic incentives within a society
. PROPERTY RIGHTS
, – Constructs in economics for determining how a resource or
economic good is used and owned
– Communal property = incentives to invest in land and work were
low (more incentives to not work and free ride)
– Free rider = someone who consumes a resource without working or
contributing to the resource’s upkeep.
– Important institutions because the encourage investment in
physical and human capital (savers won’t save and investors won’t
invest they their property isn’t secure and they will receive a
return)
– Also important for encouraging technological innovation
. HONEST GOVERNMENT
– E.g. private property exists in countries like Venezuela on paper,
but the government can take these goods at any moment -> it
lacks the rule of law (not honest government)
– An honest government is one that spends taxpayer funds on public
goods like education, infrastructure, and public health -> increases
productivity
– Corruption makes it less profitable to be an entrepreneur and more
profitable to be a corrupt politician
. POLITICAL STABILITY
– In many nations, civil war, military dictatorship, and anarchy have
destroyed the institutions necessary for economic growth
. A DEPENDABLE LEGAL SYSTEM
– In certain countries, the legal system is such low quality that no
one knows who owns it -> poorly protected property rights
– A good legal system facilitates contracts and protects private
parties from expropriating one another
. COMPETITIVE AND OPEN MARKETS
– The failure to organise capital effectively has a huge effect on the
wealth of nations
– e.g. India has many inefficient and unnecessary regulations which
create monopolies or impede markets
– Free trade opens a country up to new ideas - but also depends on
natural conditions
CHAPTER 29
Saving, Investment, and the Financial System
The collapse of the Lehman bank was the beginning for the recession of
2008-2009
Credit dried up for firms in many sectors since no one wanted to lend money to
a firm that might soon go bankrupt
