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Hi, Professor Navarro here.
Welcome back to the Power of Macroeconomics.
In this lesson, we're going to delve into one of
the most interesting mysteries in all of economics:
Why do some countries grow and prosper and why
do others remain backward and mired in poverty?
This is an important question in a business and
investing context because in a global economy,
business executives and investors are constantly
faced with strategic and tactical choices that depend on
a keen understanding of the countries within which they may
be deploying their capital investment or financial capital.
For example, should your company offshore
its production to a country in Asia like Indonesia or the
Philippines or perhaps target a Latin American country like Venezuela or Guatemala?
Should your company include in its supply chain an Asian hub like Malaysia or
Vietnam or perhaps an African hub like Nigeria or Kenya?
And where might be the best part of the world and
best countries to open new markets for your products?
And what about an investment portfolio that seeks exposure to foreign stocks?
Are you going to direct part of your investment funds to
a country like China or perhaps India,
or perhaps in seeking European exposure,
you may face a choice between Germany and Poland.
Understanding why some countries are more
prosperous than others and how the growth process
works should help you in making all of these kinds of strategic choices.
So let's get started. When you read the daily business news,
it is dominated by reports of stock price fluctuations,
the monthly unemployment rate and inflation rates,
trade statistics and speculation about whether
the central banks around the world will be raising or lowering interest rates.
All of these events are, of course,
important to you as a business executive or investor as they
help guide your economic forecast over the next 12 to 24 months.
However, as important as these events are for forecasting purposes,
they are only small ripples on the longer wave of economic growth.
Year in and year out,
advanced economies like Europe,
China and the United States accumulate large quantities of capital investment,
push out the frontiers of technological knowledge and become steadily more productive.
So, how exactly does this longer term growth process work?
To answer that question,
let's start with these key definitions.
Economic Growth represents the expansion of
a country's potential GDP or national output beyond its current limits.
Closely related to this idea is the concept of the growth rate of output per person.
The idea here is that if the growth rate per capita is rising along with economic growth,
then a country's standard of living is also rising.
So, what is the recipe for such economic growth?
Why not jot down some ideas here before we lay out
the textbook recipe to get you into the thought process of why countries differ.
Take a few minutes with this.
Think about, for example,
why your own country may be growing faster or slower than
a neighbor and what that may mean for your own future and fortunes.
When you're ready, let's move on.
Our first key point
is that all successful countries need not follow the same growth and development path.
Take Great Britain for example.
In the 19th century,
it became the world economic leader by pioneering the industrial revolution,
by inventing key technologies like the steam engine and railroads and
by emphasizing private sector capitalism and unfettered free trade.
In contrast, China in the 21st century
has made its mark by acquiring foreign technologies,
by emphasizing a state capitalist economic model
in which the government owns much of the means of production
and by adopting a more mercantilist and protectionist approach to global trade.
While countries may take different paths to growth and prosperity,
each success story shares certain common traits.
Indeed, economists who have studied growth have found
that the engine of economic progress must ride on
the same four supply side wheels and this is true no matter how rich or poor the country.
Just what are these four wheels of growth?
Please think about this for a few minutes,
maybe jot down some of your own ideas of how
nations grow and why some nations may grow faster than others.
When you're ready, let's move on.
Just what are the four wheels of growth?
They include, one, both the quality and quantity of human resource.
Two, the abundance of a nation's natural resources including land,
minerals, fuel and environmental quality.
Three, the rate of capital formation including machines,
factories and infrastructure like bridges and roads.
And four, the state of technology from science
and engineering to management and entrepreneurship.
So, let's break down each of these four wheels of growth in
our next module and see how each contributes to the growth process.
So when you're ready, let's move on.
Dr. Peter NavarroProfessor
