Figure 2.3 Relationships between Latitude and Income per Capita Q: Does geography explain differences in economic growth?

Identify at least 2 exceptions from this graph. The geography of a country is a key determinant of its climate, natural resource endowments, disease burden, transport costs and diffusion of knowledge and technology from more advanced areas. These factors have an impact on a countrys productivity and human resource quality which directly impacts the GDP of a country. From the graph it can be seen that countries close to the equator have a lower GDP per capita for example Congo and Ghana. However Singapore is an exception in this case as it has a GDP per capita almost the same as the United States. This goes to show that although geography has a significant impact on the growth of a country there are other factors that also must be taken into account. Figure 2.4 Relationship between Income per Capita and Population Growth Q: Does population growth explain differences in economic growth? Why population growth is not much of a problem for Saudi Arabia and Venezuela? According to Thomas. R. Malthus the population growth rate will decrease the per capita output, because output growth rate cannot keep the same pace. Robert Solow was of the same opinion that an increasing population growth rate would be detrimental for economic growth. An increase in the population growth rate, on one hand, increases the amount of labor (one of the two productive factors) and thus both the absolute level of output and the steady state output growth rate. On the other hand, it reduces the physical capital stock per worker; therefore there is a decrease in productivity and in the steady state output per worker. Despite the high population growth rates, Saudi Arabia and Venezuela enjoy a high GDP per capita because of being rich in natural resources like oil and other minerals. The abundance of oil in Saudi Arabia encourages the native population to have large families. Figure 3.1 GDP and Capital per Worker, 2005 Q: Does capital accumulation explain growth in output per capita? If yes, explain on which factors capital accumulation depends. Identify any 3 from the discussion in Neoclassical and Endogenous Growth models. Yes, capital accumulation does explain growth in output per capita. Countries that have had large increases in capital stock have also seen large growth in GDP. In a country, the level of capital accumulation depends on the level of savings (savings rate) and the rate of capital depreciation according to Neo Classical Growth Model. According to endogenous growth model, capital accumulation depends on indefinite investment in human capital which had spillover effect on economy and reduces the diminishing return to capital accumulation. Figure 3.3 Capitals Share of Income in a Cross-Section of Countries Q: Q: Is return on capital higher in developing countries as compared to developed countries? Identify any three exceptions. Yes in general, the return on capital is higher in developing countries than developed countries. The exceptions are Sri Lanka, Greece and South Korea. This is due to the factor of diminishing marginal return to capital accumulation is higher in developed countries as compared to developing countries.

Furthermore, industries in developed countries are saturated with capital utilization while developing countries have a higher potential for future growth. Figure 4.1 Relationship between Income per Capita and Population Growth Q: Does population growth explain economic growth differences? Identify any two exceptions. As mentioned above, increasing population growth rates are considered to be a burden on the existing economic and natural resources of a country. The GDP per capita goes down as the number of people increases at a faster rate than the increase in economic output of a country. As seen in figure 2.4 and 4.1 majority of the countries with a high population growth rate have a low GDP per capita. The two exceptions are Saudi Arabia and Venezuela. Table 5.1 Fertility in the Developing World Q: Has fertility rate fallen in all countries? There had been specific programs and policies to reduce fertility rate, but what could be possible reasons why people may themselves had reduced fertility rate as a choice? Yes, fertility rate has fallen in all developing countries. Firstly, higher education and with rising costs of college education, the cost of bearing children has increased and as a result people have chosen to marry late as well as delay having children. Secondly, high costs of living and job insecurity can make it difficult for young people to marry and start families. The increase of urbanization around the world is considered by some a central cause. In recent times, residents of urban areas tend to have fewer children than people in rural areas. The need for extra labor from children on farms does not apply to urbandwellers. Growing female participation in the work force has led to many women delaying or deciding against having children, or to not have as many. Figure 5.4 Income per Capita versus Total Fertility Rate Q: What relationship do you see between TFR and per capita income? Identify any two exceptions, one each from high income countries and low income countries? As the per capita income increases, the fertility rate decreases and vice versa. The exceptions are Saudi Arabia which has high income but moderately high fertility while Cambodia has low income but relatively lower fertility. The major factor for this is that as the level of income rises, the level of awareness and education amongst the population increases and results in higher usage of family planning and birth control methods. Secondly, the need for children decreases as married individuals are high earning people and hence do not need to give birth to more children to ensure their livelihood. Table 6.2 Breakdown of the Population by Schooling and Wages Q: Looking at last two columns, do you see any potential explanation of brain drain from developing countries? As shown in the table, more than 50% people have no schooling or incomplete primary education in developing countries. The number of people having complete higher education is very low. Such countries are a primary market for only unskilled cheap labor for multinationals. The educated people of such countries are not given preference for highly qualified jobs; rather foreign experts are given preference. Due to this reason coupled with the globalization of the labor market, highly qualified work force from the developed countries can easily find better employment opportunities in the more advanced industrialized countries. Another reason for the brain drain is because the law and order situation 1

prevalent in developing countries is a cause of concern for the highly educated people. They choose to have a peaceful life in another country with a stable economic environment and better health and safety. Figure 6.11 Average Years of Schooling versus GDP per Capita Q: What relationship do you see between education and economic growth? What could be the possible reason why Portugal has a closer GDP per capita to US despite substantially low years of schooling? Also how can you explain the same thing between South Africa and China? As seen in the graph, countries with high average years of schooling have a higher GDP per capita. Japan and the United States are prime examples exhibiting the benefits of a highly educated work force. Increased education increases the economic output of a country in mainly two ways, first it improves the quality of labor and secondly it improves productivity because of industrialization and technological advancements. Portugal has a closer GDP per capita to the US because it is a member of the European Union. It reaps economic benefits by being part of that union, resulting in a closer GDP per capita to the US. As for South Africa and China, these countries have a close GDP per capita due to specialization of their work force in particular fields. Figure 6.13 Student Test Scores Versus GDP per Capita Q: Are only developed countries students brilliant? Can you identify one clear exception? Can you identify two geographical cluster of countries, one African and one East Asian? Has it anything to do with innate abilities difference due to genetics, differences in values or just because of growth? According to the figure, the trend is that higher the GDP per capita, the higher the Student Test Scores. However, one clear exception is Nigeria which despite having the lowest GDP per capita has an average student test score. The African cluster of countries consists of Nigeria and Mozambique and the East Asian cluster of countries includes Singapore and Hong Kong. The performance of students in test scores is not necessarily a good indicator of intelligence. Intelligence is dependant on a range of factors such as genetics as witnessed by Ashkenazi jews prominence among Nobel recipients. Other factors include, growth, culture and values. Figure 12.1 Rule of Law and Factor Accumulation, 2005 Q: Where do smart workers go and where does capital fly? Post 2005 data may have changed and India and China may have moved vertically up in the graph? How would you explain reasons for this vertical movement of India and China? According to the given figure, factors of production (labour) is higher in countries with higher rule of law index. Hence countries with better security are said to have higher amount of factors of producton. China and India may have moved vertically up in the graph due to increase foreign direct investment, labor improvement through education and training, higher incentives given to entrepreneurs and also government investment in the economy. Figure 12.2 Rule of Law and Productivity Q: Does security matter in economic matters? Explain in light of this graph. Explain the reason why productivity is high in more secure countries? Previous slide may also be used as a guide for it. It is important to understand the rule of law is a multi dimensional concept encompassing a variety of factors including security of person and property rights to checks on government and control of population. As seen in the graph countries with a value for rule of law index have a greater value for 2

productivity and vice versa. Absence of rule of law is one of the major reasons for brain drain in developing countries. Keeping this in mind it is safe to say that security does matter in economic matters. A prime example of a countrys economy suffering due to lack of security and rule of law is Pakistan. Increased corruption, institutional failure, weak law and order enforcement and weak protection of property rights are hampering Pakistans economy. Figure 12.5 Government Corruption Versus GDP per Capita, 2005 Q: How does corruption control affect growth? Explain with this graph. Corruption control increases the growth of the economy. This is because it reduces costs, increases productivity, encourages investment, increases confidence in public institutions, enables development of small and medium enterprises, strengthens systems of public financial management and helps in investment in health and education. As seen from the graph countries such as Iceland and Norway which have high corruption control also have higher GDP per capita while Cambodia has low corruption control and low GDP. High GDP per capita indicates faster economic growth where public investment is made on productive projects and a more reliable tax collection system which ensures availability of funds to the poor to borrow and increase their income. Figure 12.6 Democracy and GDP per Capita Q: Does democracy have a clear link with growth? Identify 2 exceptions, one each from highly democratic countries and one from less democratic countries. On average, on all levels of democracy there are countries with a high GDP per capita. Democracy does not have a clear link with democracy as can be seen from the graph. It is not the nature of a countries political system that determines its economic growth but the policies that it implements. Chinas economic growth is a testament to the fact that democracy is not necessary for economic growth. On the other hand we have the United States which shows how a democracy can be responsible for sustainable economic growth. Figure 14.5 Ethnic Fractionalization versus GDP per Capita Q: Is there a clear link between ethnic fractionalization and growth? Identify 2 countries that have made positive use of diversity. Identify 2 that have not. Identify 2 that still did not grow despite very low ethnic fractionalization. There is no clear link between ethnic fractionalization and economic growth, as seen in the graph. Canada and Belgium are two countries that have made good use of the diversity and have a high GDP per capita. Sierra Leone and Madagascar are two countries which have suffered due to the high ethnic diversity. Trifled by constant clashes amongst different clans and tribes the countries have a low GDP per capita as shown in the graph. Cambodia and Burundi are two countries which have not grown despite the low ethnic diversity. Figure 14.6 Population Density Versus Economic Growth Q: Does population density matter for growth? Explain contrast between African and East Asian countries? Explain any other way this difference may have occurred and hence population density is not necessarily an important factor for growth differences between Africa and East Asia. As observed from the graph, the trend in general is that countries with higher population density have higher growth rate of GDP per capita. African countries such as Zambia, Niger, and Madagascar have 3

relatively lower population density as compared to East Asian countries such as Sri Lanka, Jamaica, South Korea and Singapore and hence African countries have relatively lower growth rate of GDP per capita as compared to East Asian countries. However, that may not always be the case. The GDP growth rate could also have been affected by cultural factors such as the propensity for education which lead to better capital utilization and economic growth. Secondly the growth difference could be due to the climatic differences between the regions which would have influenced the productivity of resources. Thirdly, the policies of the government of the respective countries in the regions could be a factor for the growth differences. Figure 15.2 Regional Variations in Income and Access to the Sea Q: Does closeness to sea matter for growth? Do wars/conflicts occur more often near to sea and mineral sites? Has Africa been disadvantaged due to its location? If yes, why exactly? Closeness to the sea gives countries a competitive advantage over landlocked countries and hence boosts their economic growth. It gives a country access to global markets more easily causing increased trade traffic which is good for a countries economy. Recently wars have been waged in countries which are having vast oil reserves. Along with closeness to the sea, a strategic location is also vital for economic growth. This is why Africa is at a disadvantage, coupled with the fact that only 20% of the population has access to the sea. Figure 15.7 Natural Capital Versus GDP per Capita Q: Does natural endowments explain economic growth? Identify 2 countries with relatively similar level of natural capital per capita, but different GDP per capita? Explain any important reason for that. According to the figure, the trend that is observed is that higher natural endowments in a country resulted higher economic growth. Niger and United States have relatively similar level of natural capital per capita but very different GDP per capita. The GDP per capita for United States is comparatively very much higher than that of Niger. Firstly, there is a difference of labor productivity in both countries. Since the literacy rate of United States is higher than Niger, better education of population leads to better utilization of natural resources and their redirection in economically viable ventures. This results in more economic growth. Hence natural resource utilization is important. Secondly, the level of government investment in capital projects is higher in the United States, which results in more business activity and hence a higher level of resource utilization to produce higher GDP per capita. Figure 16.8 GDP per Capita versus Carbon Dioxide Emissions per Capita Q: Who damages environment most? Why such a growth pattern is less ideal in long run? Highly industrialized and developed countries are responsible for the high carbon emissions. Such a growth pattern may be suitable for now but is not sustainable as the high carbon emissions take a toll on the natural resources of the earth. In order to control this issue carbon credits are now tradable amongst different countries. Figure 17.2 Relationship Between Income and Happiness in a Cross-Section of Countries Q: Does money buy happiness? Identify 2 exceptions. Does happiness depend on ones worldview and values as well? Is it dynamic or static? If poverty is a relative concept, why cant happiness be? What do you think? 4

According to the above given figure, countries with higher levels of GDP per capita have higher level of subjective wellbeing. However, there are 2 countries which are exceptions in this case which are China and Colombia both of which have low GDP per capita but high levels of subjective wellbeing. Happiness is subjective in few matters such as the religious and cultural values of a specific society. It is dynamic in nature, and with changing traditions and societal norms, the factors which govern happiness may also change. In general however, happiness depends on the fulfilment of a small range of needs which include healthy relationships, food and security. These needs are mostly fulfilled in most if not all countries and hence happiness is in some sense a more absolute concept than poverty. Hence the difference lies in the fact that poverty in itself is dependent on happiness and a society may judge itself to be poor on the basis of the level of happiness rather than the possession of monetary assets. Poverty is a means to an end while Happiness is an end in itself. All human beings strive to achieve happiness in life. Happiness is something which is within the reach and choice of the individual and a person may choose to be happy or not while poverty is something which maybe beyond ones control.