LONGRUN ECONOMIC GROWTH Part 2

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LONG-RUN ECONOMIC GROWTHPart 2
PRINCIPLES OF MACROECONOMICS

• Dr. Fidel Gonzalez
• Department of Economics and Intl. Business
• Sam Houston State University

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• In the first part of Lon-run Economic Growth
  slides, we observed that most low-income
  countries have small rates of growth. However,
  our model would predict the opposite countries
  with low K/L have small diminishing returns to
  capital, so increases in K/L will bring bigger
  changes in Y/L compared to developed countries.
• This begs the following question
• Q Why developing countries have not experienced
  rapid growth?
• There are several explanations and if you ask
  anybody they can probably tell you why some
  countries have not developed as they should.
  However, we can summarize the main reasons in the
  following
• Failure to enforce the law.
• Wars and revolutions.
• Poor public education and health
• Low rates of savings and investment

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• Failure to enforce the law
• In many developing countries it is difficult to
  enforce the law and this affect their economic
  production. When the law is difficult to enforce
  we observe the following problem
• Some people do not pay taxes and those resource
  could be used to improve a countrys provision of
  public goods such as education, research and
  development, highways, ports, airports, among
  others.
• Property rights are not properly protected so
  inventors and businesses are not willing to
  produce new technologies because they do not
  capture the full benefit of their inventions.
• Investments and private property are poorly
  protected so people have no incentive to buy
  private property.

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2) Wars and revolution Wars and revolution
destroy an economys ability to produce. It
reduces the infrastructure and labor. That is,
capital and labor decrease during wars. 3) Poor
public education and health Having good
education increases a countrys ability to
generate and adapt new technologies. Higher
public health also generates healthier workers
which also producer more productive workers.
Moreover, better health also increases the amount
of workers in a country. 4) Low rates of savings
and investment Developing countries have low
savings and investment. That translates into
lower capital level and therefore lower
productivity.