This paper tries to analyze why some countries are richer than others. Economic theory is used to identify the different factors affecting countries to be richer or poorer.
One of the fundamental questions regarding the world during all the time is why some counties are richer than others. How is it possible that there are some countries in 21st century, where families cannot feed their children, where education, medical care and simple things which are necessary for everyday life does not exist. And why does still more than half of the world population live worse than people who lived in the UK in 1900. (Krugman,Wells, Graddy, p. 611). Figure 1 shows the Gross National Income per Capita at 2007. It shows that lots of countries have very low national income, especially the African countries. Furthermore it shows that Europe, North America and Australia have the highest national income. The question is why this big difference? Economic growth is measured using real GDP per capita. “If economic growth is to give an indication of an increase in living standards, it has to be measured per head of the population.” (Sloman, Wride, p.256). Long run economic growth depends almost entirely on one ingredient, rising productivity. ”Overall GDP can grow because of population growth, but any large increase in real GDP per capita must be the result of increased output per worker.” (Krugman,Wells, Graddy , p 616) A number of factors affect the growth of productivity. Productivity equals real GDP by number of people working. This essay tries to analyze why there is this difference between living standards of countries and uses economic theory to explain it.
“Physical capital consist of human-made resources such as building or machine” (Krugman, Wells, Graddy, p.616) Physical capital helps to make the life of people easier and makes people more productive. “For example: a worker operating a mechanical digger can dig many more meters of trench per day than one equipped only with a shovel.” (Krugman, Wells, Graddy, p.616)“
Infrastructure which includes roads, power lines, and information networks provides foundation for economy activity. Infrastructure also includes private, foreign companies which require a great deal of government regulation and support. Good infrastructure can influence the economic growth of countries. One of the best examples is Ireland. Ireland was the poorest Western European country in 1970s. But its real GDP per capita was growth very fast and nowadays the Irish real GDP per capita is higher than the United Kingdom or Germany. The reason of this fast growth is the infrastructure. Ireland has very good airports and, excellent telecommunications and very good shipping facilities. ( Krugman, Wells, Graddy, 2008) In poor countries one of the biggest problems is the diseases control. For examples a very common illness is AIDS in most of the African countries. It can result of the higher death rate and lower population growth rate. To provide good infrastructure, government should try to change it.
Saving and investment spending
“To increase the physical capital available to workers, an economy must engage in investment spending.” (Krugman, Wells, Graddy, p.624) There are two ways of doing it. One is the domestic and the other one is the foreign saving. “Both the amount of saving and the ability of an economy to direct saving into productive investment spending depend on the economy’s institutions, notably its financial system.”( Krugman, Wells, Graddy, p.624) An excellent banking system is very important for economic growth. For example, Luxemburg is a geographically small country, but one of the richest in the world. It has more than 250 banks with excellent banking system. Government policy has an effect on saving and investment spending. There are also 2...