Check Your Understanding

1. Question

   Explain the link between a country’s growth rate, its investment spending as a percent of GDP, and its domestic savings.

   A country that has high domestic savings is able to achieve a high rate of investment spending as a percent of GDP. This, in turn, allows the country to achieve a high growth rate.

2. Question

   Which of the following is the better predictor of a future high long-run growth rate: a high standard of living today or high levels of savings and investment spending? Explain your answer.

   As you can see from panel (b) of the figure in the FYI box on page 381, although it is important in determining the growth rate for some countries (such as those of Western Europe), the initial level of GDP per capita isn’t a particularly good predictor of high future growth rates. High rates of savings and investment appear to be better predictors of future growth than today’s standard of living.

3. Question

   Some economists think the best way to help African countries is for wealthier countries to provide more funds for basic infrastructure. Others think this policy will have no long-run effect unless African countries have the financial and political means to maintain this infrastructure. What policies would you suggest?

   The evidence suggests that both sets of factors matter: better infrastructure is important for growth, but so is political and financial stability. Policies should try to address both areas.

4. Question

   What is the link between greenhouse gas emissions and growth? What is the expected effect on growth from emissions reduction? Why is international burden sharing of greenhouse gas emissions reduction a contentious problem?

   Growth increases a country’s greenhouse gas emissions. The current best estimates are that a large reduction in emissions will result in only a modest reduction in growth. The international burden sharing of greenhouse gas emissions reduction is contentious because rich countries are reluctant to pay the costs of reducing their emissions only to see newly emerging countries like China rapidly increase their emissions. Poorer countries like China are equally reluctant to limit their growth to protect an environment threatened by the past actions of rich countries.