Overview: Growth and Development

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Hyperinflation and depression interest economists because they are extreme cases of common problems. In the United States, for example, unemployment rates have been as low as 2.5% in May of 1953, 3.4% in October of 1968, and 3.6% in April 2000, but as high as 9.0% in May of 1975, 10.8% in December of 1982, and 10.1% in October of 2009.1 Inflation has varied as well. From 1954 to 1964 the price level rose only 15%, but from 1973 to 1983, it more than doubled, rising 130%. Recent inflation, from 1999 to 2009, has been fairly mild, but still the price level rose by more than 30% during these years.2 Although these numbers are small compared to what happened in the Great Inflation and the Great Depression, and also compared to what has happened in other countries in the past 50 years, they indicate the persistence of problems in economic performance of Western nations.

Although news media emphasize macroeconomic problems, a strong case can be made that problems involving economic growth and development are far more important. Indeed, economics began when Adam Smith set out to explain how a nation becomes wealthy, or in today's terms, how it develops economically.

There are several reasons the issues of development may not attract the attention they deserve both in economics courses and in the headlines. Most economists and reporters live in industrialized nations where development problems are no longer serious. Also, key ingredients to economic growth, such as technological change, creativity, culture, customs, social institutions, and expectations, are difficult to incorporate into economic analysis, in part because they are hard to define and measure.

1 Data from http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LNS14000000

2 Computed January to January from ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

After you complete this unit, you should be able to:

  • List the three classes of productive resources that economists have traditionally used.
  • Distinguish between human and physical capital.
  • Explain how a focus on division of labor and specialization suggests that free trade and globalization are beneficial.
  • Explain why savings are need for long-run growth.
  • Explain the role financial markets and institutions play in growth.
  • Explain the concept of a poverty trap.
  • Explain why changes in technology are important for growth over time, but why they do not tell us much about the gap between rich and poor nations today.
  • Give at least three examples of government policies that will hinder economic growth.
  • Explain why some believe that there are cultural values that are toxic for growth.

Copyright Robert Schenk