İktisada Giriş II Production and Growth (2) Chapter 2 5 : Production and Growth In this chapter we are going to focus on the issues of development and growth. Economic Growth around the World : Show growth and level data across 1- the world on Slide 1 from Charles Jones. On this table, Real GDP is in 1985 dollars. Notice South Korea, Taiwan, Hong Kong and Singapore. They grew at an average growth rate of more than 5 % every year. So they became rich very quickly. We call them growth miracles. But there are also “ growth disasters ” like Venezuela and some Af rican countries. They were rich in the past, but they did not grow and instead they became poorer. Also show the data on Slide 1. On this data, we can see that Argentina was a rich country 100 years ago. Argentina was much richer than Japan. But Japan gre w very fast and became the third richest country in the world. But Argentina dropped from the champions ’ league and became a middle-income country. Let us look at Tu r key ’ s data from Penn World Tables ( PWTdata.xls ) . This table shows Turkey ’ s Real GDP with year 2000 constant dollars. Between 1950 and 2004, Turkish economy grew close to 4 times . On average , Turkish economy grew 5.3 % e very year. This is a very high growth rate and puts Turkey in “ growth miracles ” group with Singapore and Hong Kong. How can w e explain differences in levels of income and growth rates of 2- income across countries? We can explain these differences by productivity. Productivity: is the amount of goods and services that an average worker produces in one hour. 1Why Productivity is so I mportant : Because it explains why rich countries a. are rich and why poor countries are poor. How Productivity is Determined ? It is determined by Factors of b. Production : Physical Capital i. Human Capital ii. Natural Resources iii. Technological Knowledge : Show the sehirle sme.xls file to iv. show the technological improvements in farming. Production Function 3- Economic Growth and Public Policy 4- The Importance of Saving and Investment a. Diminishing Returns and the Convergence Phenomenon b. Investment from Abroad c. Education d. Property Right s (Mulkiyet Haklari) and Political Stability (Politik Istikrar) e. Free Trade f. Research and Development g. Population Growth h. Malthus ’ mistaken theory: geometric population growth, linear i. food growth. Earlier economic theory argues that larger population ii. growth c auses poverty, because it causes the capital stock to be 2spread more thinly across population. For example, it becomes harder to provide quality education to children. So human capital cannot increase as fast as population. The more recent econ o mic theor ies by Paul Romer and iii. Michael Kremer argue that population growth is the driving force behind technological growth . Show the historical population data from Charles Jones ’ slides. As we can see on this graph, faster economic growth started in 18 th century, the same period where faster population growth was observed. Paul Romer has shown that faster population growth creates faster growth of new ideas and inventions in the economy. He proposed the idea This might also explain why developed countries of the 1. world are growing slower than less developed economies: maybe because LDCs have larger rates of population growth than developed Western Europe and US . Slower population growth also creates risks for the social iv. security system (SSS) . These risks threaten t he whole economy as it is the case in Turkey ’ s SSS. It is well known that as population growth slows, ratio of number of current workers / number of retirees decreases. This causes a pay-as-you-go (PAYG) SSS to have smaller inflow of money and larger outfl ow of money as time passes . 3It is hard to understand why developed countries try to v. promote birth control in less developed countries but give incentives for more children in their own countries. We know that developed economies including Germany, Britain, US are providing support for additional children. This support has several forms. They give free medical service for small children. They give tax exemptions for families with children. 4