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Lecture 6 - Economic Growth 1(A). After completing this unit, you should be able to: Learn the closed economy Solow model, see how a country’s standard of living depends on its saving and population growth rates. | Review of the previous lecture The real interest rate adjusts to equate the demand for and supply of goods and services loanable funds A decrease in national saving causes the interest rate to rise and investment to fall. An increase in investment demand causes the interest rate to rise, but does not affect the equilibrium level of investment if the supply of loanable funds is fixed. Lecture 6 Economic Growth – 1(A) Instructor: Prof. Dr.Qaisar Abbas Lecture Contents Learn the closed economy Solow model See how a country’s standard of living depends on its saving and population growth rates Selected poverty statistics In the poorest one-fifth of all countries, daily caloric intake is 1/3 lower than in the richest fifth the infant mortality rate is 200 per 1000 births, compared to 4 per 1000 births in the richest fifth. source: The Elusive Quest for Growth, by William Easterly. (MIT Press, 2001) selected poverty statistics In Pakistan, 85% of people live on less than . | Review of the previous lecture The real interest rate adjusts to equate the demand for and supply of goods and services loanable funds A decrease in national saving causes the interest rate to rise and investment to fall. An increase in investment demand causes the interest rate to rise, but does not affect the equilibrium level of investment if the supply of loanable funds is fixed. Lecture 6 Economic Growth – 1(A) Instructor: Prof. Dr.Qaisar Abbas Lecture Contents Learn the closed economy Solow model See how a country’s standard of living depends on its saving and population growth rates Selected poverty statistics In the poorest one-fifth of all countries, daily caloric intake is 1/3 lower than in the richest fifth the infant mortality rate is 200 per 1000 births, compared to 4 per 1000 births in the richest fifth. source: The Elusive Quest for Growth, by William Easterly. (MIT Press, 2001) selected poverty statistics In Pakistan, 85% of people live on less than $2/day One-fourth of the poorest countries have had famines during the past 3 decades. (none of the richest countries had famines) Poverty is associated with the oppression of women and minorities source: The Elusive Quest for Growth, by William Easterly. (MIT Press, 2001) Estimated effects of economic growth A 10% increase in income is associated with a 6% decrease in infant mortality Income growth also reduces poverty. Example: +65% -12% 1997-99 -25% +76% Growth and Poverty in Indonesia 1984-96 change in # of persons living below poverty line change in income per capita source: The Elusive Quest for Growth, by William Easterly. (MIT Press, 2001) This is just one of many concrete examples of the negative relationship between economic growth and the poverty rate. Income and poverty in the world selected countries, 2000 source: The Elusive Quest for Growth, by William Easterly. (MIT Press, 2001) Huge effects from tiny differences In rich countries like the U.S., if government
