MakingCan IndiaSustain ItsRapid Growth?theConnectionTomany people, the rapidGrowthrateofrealGDPeconomicriseofIndiawasper capita7%unexpected.6·Beforeitsindependencefrom5England in 1947,growth rates4in India were very low, and3India was desperately poor.2In 1991, the Indian1government decided to scale0backcentralplanning,reduce188519471948-19911992-20022003-2012regulations, and introducemarket-based reforms.In order to continue to grow, many economists believe India will needto upgrade infrastructure,improve provision of educational andhealthservices,and renewits commitmenttotheruleoflawandmarket-basedreforms@2015Pea11sonEducation,Inc
© 2015 Pearson Education, Inc. 11 Making the Connection Can India Sustain Its Rapid Growth? To many people, the rapid economic rise of India was unexpected. • Before its independence from England in 1947, growth rates in India were very low, and India was desperately poor. • In 1991, the Indian government decided to scale back central planning, reduce regulations, and introduce market-based reforms. In order to continue to grow, many economists believe India will need to upgrade infrastructure, improve provision of educational and health services, and renew its commitment to the rule of law and market-based reforms
PotentialGDPPotentialGDPreferstothelevelofrealGDPattained whenallfirmsare operating at capacity. Capacity here refers to“normal"hours anda“normal"sizedworkforce.: Potential GDP rises when the labor force expands, when a nationacquires more capital stock, orwhen newtechnologies arecreated.The growth in potential GDP in the U.S. has been relatively steady atabout 3.2%; that is, the potential to produce final goods and serviceshas been growing in the U.S. at about this rate over time.The recession of 2007-2009 resulted in a wider than usual gapbetweenpotentialand actualGDP,asthenext slideillustrates122015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 12 Potential GDP Potential GDP refers to the level of real GDP attained when all firms are operating at capacity. Capacity here refers to “normal” hours and a “normal” sized workforce. • Potential GDP rises when the labor force expands, when a nation acquires more capital stock, or when new technologies are created. The growth in potential GDP in the U.S. has been relatively steady at about 3.2%; that is, the potential to produce final goods and services has been growing in the U.S. at about this rate over time. The recession of 2007-2009 resulted in a wider than usual gap between potential and actual GDP, as the next slide illustrates
Actualand Potential GDP inthe United StatesRealGDP(billionsofActualRealGDP2009dollars)PotentialGDP$17,00016,00015,00014,000Recessionof13,0002007-200912,000Recessionof11,000200110,0009,000Recessionof1990-19918,0001989199119931995199719992001200320052007200920112013Figure 10.2ActualandpotentialGDP13@2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 13 Actual and Potential GDP in the United States Actual and potential GDP Figure 10.2
Saving,Investment,andtheFinancialSystem10.2LEARNINGOBJECTIVEDiscuss therole of thefinancial system in facilitating long-runeconomicgrowth@2015PearsonEducafion,lnc14
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 14 Saving, Investment, and the Financial System 10.2 Discuss the role of the financial system in facilitating long-run economic growth
TheFinancial SystemFirms canfinance some of their ownexpansion throughretainedearnings, reinvesting profits back into the firm.But often firms want to obtain more funds for expansion than areavailable in this wayTheyobtainthese funds viathe financial system:the systemoffinancial markets and financial intermediaries through whichfirms acquirefundsfromhouseholds.Example: stock and bond marketsExample:banks@2015PearsonEducation,Inc.15
© 2015 Pearson Education, Inc. 15 The Financial System Firms can finance some of their own expansion through retained earnings, reinvesting profits back into the firm. But often firms want to obtain more funds for expansion than are available in this way. They obtain these funds via the financial system: the system of financial markets and financial intermediaries through which firms acquire funds from households. Example: stock and bond markets Example: banks