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Chapter 4

Chapter 4 readings notes

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Gross national product per capita is used as summary index of relative economic well being of people
in different countries
gnp most commonly used measure of overall level of economic activity
gdp measures total value for final use of output produced by an economy
principle of diminishing marginal productivity states that if increasing amounts of a variable factor
(labor) are applied to fixed amounts of other factors (capital, land, materials), the extra or marginal
product of the variable factor declines beyond a certain number
low levels of labour productivity can be explained by absence or lack of “complementary” factor
inputs like physical capital or experienced management
to raise productivity domestic savings and foreign finance must be mobilized to generate new
investment in physical capital goods and build up the stock of human capital through investment in
education and training
institutional changes are necessary to maximize this potential of mew physical plus human invesmtnet
reform of land tenure, coporate tax, banking strcture etc.
these and other non economic inputs into the social production function have to be taken into account
if strategies to raise productivity are to succeed
also have to take into account the impact of worker and management attitude toward self improvement
low levels of living and low productivity are self-reinforcing social and economic phenomena in poor
countries and are the principal manifestations of and contributors to their underdevelopment
living stan d ards in all co u n tries tend to rise over ti me
comparative p o sitio n of p o or countries
develop ment g ap affe c ts the g rowth of p er c a pit a income that p o or co u n tries
must a c hieve eit her to prevent a d eterioratio n of present comparative p o si tio n or
relative differenc e s will n ar row as long as the p er c a pit a income g rowth rate of
developin g countries is more than that of d evelo p ed co u n tries
this exc e s s of growth is pre co n ditio n for absolute differenc e s to n ar row an d
sh ort run: n arrowing of relative differenc e s related to widering absolute
rate of growth needed to keep absolute per capital income gap from widening is
likely to be greater than whats needed to keep the relative gap the same
in economics dispersions of income measured in relative not absolute terms
rich and poor countries: even if relative per capita income gap is narrowed the
comparative position of poor may have worsened because of absolute gap
both absolute and relative gap between rich and poor countries widened in last
30 years
assume desirabl goal is to nrrow and eliminate both absolute and relative gap
take avg per capital income of industrialized countries and answer 4 questions
how long it would take poor countries to reach current avg level of per capita
income of industrialized nations?
Given recent growth experience of poor countries relative to industrializedc
countries how ma ny years would it take for per capita income gap to be
Given rate of growth of industrialized countries ho w fast would poor countries to
habe to frow for per capita incomes to equalized
Given rate of growth of industrialized countries, how fast would poor countries
have to grow to prevent absolute per capita income between rich and poor
First t wo questions give idea of the time scale needed for catch up process of
poor countries using recent growth performance
Last two give idea on growth task facing poor countries in their struggle and in
preventing absolute gap from widening
The lower the growth rate the less for midable the growth effort of t he poor
countries to achieve parity of living standards
tolerable living standards
4.3 *
HDI based on 3 indicators: longevity ( measured by life expectancy at birth),
education (measuered by adult literacy and combined primary, secondary,
tertiary enrolemnt ratios), and standard of living ( measured by real GDP per
800 million of worlds 6 billion people live on a high economic peak 18
countries mostly in Europe and north America, gdp per capita: 25000 - 35000
5 billion live in the lowlands 111 countries, per capita income: 8000 or below
340 million between lowlands and peak
Gdp per capita best single indicator of material standard of living
Gap between poor and rich countries threaten global stability
Frustration, envy and wounded pride of poor are causing rogue nations to seek
power and influence t hrough development of wmds and individual extremists to
lash out against rich countries throough terrorism
Immigrations pressures unsustainable
Poor see moving to rih countries as only way to improve t heir way of life
Worlds poor is little improved and numbers doubled
At current rates of performance, it wouild tak poro countries a couple of
centuries to catch if they even can at all
Problem and solution to econo mic success lies in public policies
Disparaties in wealth among those nations at peak of global economic landscape
Japan following a low productivity path and Europe making unnecessary
distortions in its markets to achieve its social objectives
Japans growth caused by massive increase in hours worked and plant and equipment applied i
economic activity greater than those in western countries
Europe and US followed high productivity path
Europe following lower poverty path than US
Europe making different kind of trade off to create a society that many would prefer: trading hi
gdp per capita for lower poverty rate
Study of individual businesses
Builds understand of economy from the ground up
Microecon is about behavior of firms in same market
These girms are in same market because they sell same goods and services to the same custo