The Wealth of Nations and

Economic Growth
Chapter 6
1
2 0 1 0 WORTH PUBL I SHERS MODERN PRI NCI PLES: MACROECONOMI CS
COWEN AND TABARROK
The worlds average (mean) GDP per capita
is $9,133. There are roughly 6 billion people
in the world. What is the worlds total GDP?

a)$55,000
b)$55,000,000
c)$55 billion
d)$555 trillion
e)$55 trillion

Wealth of Nations

Institutions
Why do poor countries use their capital
inefficiently?
3
Try it!
4
What is the most proximate (or direct)
cause of growth in real GDP per capita?
a) the factors of production
b) political system in the economy
c) institutions
d) incentives

Try it!
5
Human capital is the
a) stock of tools including machines,
structures, and equipment.
b) productive knowledge and skills that
workers acquire through education,
training, and experience.
c) knowledge about how the world works
that is used to produce goods and
services.
d) organization skills of business owners.
Try it!
6
Which of the below is not directly
related to human capital?
a) a life-saving drug
b) schooling
c) work experience
d) an understanding of chemistry

Try it!
7
Why did so many Chinese farmers and
workers starve under The Great Leap
Forward?
a) The number of workers on communes was
reduced.
b) The Chinese people did not know how to
farm in certain geographic areas.
c) The incentive to work hard was low since
the rewards were so minimal.
d) All of the answers are correct.

The Rule of 70 (The Magic of
Compounding)
The rule of 70:


Example: If real GDP per capita is growing at
an annual growth rate of 3.5%, it will double in:



The moral? Small improvements in growth add
up fast (the power of compounding).

8
%
70
time Doubling
in rate growth
=
years. 20
5 . 3
70
=
Appendix
The rule of 70 is handy, but using a Microsoft
Excel spreadsheet can help answer more
difficult questions.
Compound Growth: The Long Method
If the growth rate of Real GDP in the
U.S. is 3%, how many years will it take
to double?
a) approximately 12 years
b) approximately 210 years
c) approximately 23 years
d) approximately 33 years
e) none of these

Rule of 70

Try it!
11
If China experiences a 10% annual growth rate
in real GDP, compared to Germany which
experiences a 2% annual growth rate, by how
many years will Chinas GDP double sooner than
Germanys?
a) 7 years sooner
b) 28 years sooner
c) 35 years sooner
d) 4 years sooner
e) 10 years sooner


Rule of 70

Try it!
12
If a nation doubles its GDP per capita in
20 years, what is its annual growth rate?

a) 3.5%
b) 4.2%
c) 6.5%
d) 7%
e) 5%


Rule of 70

Appendix
The rule of 70 is handy, but using a Microsoft
Excel spreadsheet can help answer more
difficult questions.
Compound Growth: The Long Method
Appendix
Compound Growth: The Shortcut
If the growth rate is r percent and we grow for
n years then:
n
r
|
.
|

\
|
+ =
100
1 Value Starting Value Ending
Appendix
Use Excels Goal Seek to work backward to
find, for example: number of years to reach a
certain level of GDP.






The ending value in cell B6 is fixed at
1,000,000. Excel then calculates the value of
the variable in B2, that will give this result.
Appendix
The problem is solved







Starting with $46,000 and growing at a rate
of 2%, it will take a little over 150 years to
reach $1,000,000.