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Economics: Policies to Promote Growth


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About this Lesson

  • Type: Video Tutorial
  • Length: 7:50
  • Media: Video/mp4
  • Use: Watch Online & Download
  • Access Period: Unrestricted
  • Download: MP4 (iPod compatible)
  • Size: 83 MB
  • Posted: 03/29/2010

This lesson is part of the following series:

Economics: Full Course (269 lessons, $198.00)
Economics: Productivity and Growth (12 lessons, $18.81)
Economics: Emerging Economies (4 lessons, $6.93)

This economics video lesson will teach you about policies that promote growth. Taught by Professor Tomlinson, this lesson was selected from a broader, comprehensive course, Economics. This course and others are available from Thinkwell, Inc. The full course can be found at The full course covers economic thinking, markets, consumer choice, household behavior, production, costs, perfect competition, market models, resource markets, market failures, market outcomes, macroeconomics, macroeconomic measurements, economic fluctuations, unemployment, inflation, the aggregate expenditures model, banking, spending, saving, investing, aggregate demand and aggregate supply model, monetary policy, fiscal policy, productivity and growth, and international examples.

Steven Tomlinson teaches economics at the Acton School of Business in Austin, Texas. He graduated with highest honors from the University of Oklahoma and earned a Ph.D. in economics at Stanford University. Prof. Tomlinson's academic awards include the prestigious Texas Excellence Teaching Award given by the University of Texas Alumni Association and being named "Outstanding Core Faculty in the MBA Program" several times. He has developed several instructional guides and computerized educational programs for economics.

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Consider now some ways in which government policy can help a country escape from the cycle of poverty. Let's consider some strategies now that governments use to try to promote the development of their economies. Remember an economy can be stuck in a low-level equilibrium whenever per capital gross domestic product is low, therefore savings and demand is low, so that there isn't a lot of return on investments in human and physical capital. That then keeps productivity low, which just keeps the cycle going. When economy is stuck in this situation, there are several points in this chain where the government might try to break in to help the economy move to a more prosperous equilibrium. Let's consider some of these policies.
The first is that the government might intentionally try to move its economy from agricultural production to industrial production. The believe here is that industrial production usually involves higher labor productivity, which increases per capita gross domestic product and lifts the economy out of poverty. Well, that's a great idea, except that some economies really are better suited for agricultural production than for industrial production, given their natural resources and the skills of their laborers at a particular point in history. If you want to try to move into industrial production before your economy is ready, then you're going to be giving up a chance to earn profits on agricultural production. It may be that good investments in technology to improve the productivity of agricultural production would be a better move for the economy than trying to shift it into industry instead. So the countries that have tried this have done so with mixed results.
Another strategy that governments often use is to try to stimulate demand by producing products that foreigners want to buy; that is, to try to get export demand to lift the economy out of poverty. This, of course, involves moving your production away from goods that people want to buy domestically into the production of goods that foreigners want to buy. And countries that have tried this have, once again, done so with mixed results. Japan tried to move its resources from domestic production into industrial production, and nowadays it seems like that Japan succeeded; that is, its efforts on the part of the government to coordinate the allocation of resources and product goods after World War II that would be bought by foreigners was associated with Japan's rapid increase in per capital gross domestic product. But we don't know but what Japan would have done just as well if it had produced goods for its domestic market and let trade arise naturally rather than as an intention of government policy. A lot of countries that have tried to produce the export goods instead of goods that were demanded domestically have found themselves in desperate situations; that is, the goods didn't do well, because they were poor quality, the resources and labor of the country weren't well suited to the production of these goods and overall it was just a bad move, because the country moved against its comparative advantage and per capital GDP actually fell. Plus, anytime you get the government involved in the allocation of resources in your economy, you're asking for trouble, from the point of view of a free market economist. And we'll get to that argument next.
This is the argument that's made about central planning, that sometimes you can break out of this cycle by moving away from free market allocation of goods and services towards allocation that's directed by the government. The government intentionally says, "You people over here are going to become welders, and you over here are going to become shipbuilders, and you're going to become auto manufacturers and we're going to just create a developed economy by brute force of our will." Well, the problem with central planning is that a central planner has to collect a lot of information about what people in this economy are good at. And that information, from the point of view of a free market economist, is better collected by the impersonal forces of supply and demand. Let the price mechanism tell you where you can get the highest reward on your talents, and your capital and your natural resources. The government doesn't have any better information than the market does and, in many cases, its information is not as good. Plus, whenever you put somebody at the top of your economy, this guy now has an incentive to manipulate the economy to his own advantages or the advantages of his friends and you get all kinds of government corruption. Plus, everybody in the economy now knows that there's somebody running the economy that functions kind of like Santa Claus. If you're nice to him, maybe he'll be nice to you and you go and ask him for the things that you want. And people divert their efforts away from the productive investment in the creation of goods and services and instead they spend their time lobbying the government to get this guy to redistribute resources in their direction, which creates all kinds of waste. This is what happened in Mexico in the 1950's, when Mexico became determined to become an export-led growth economy. The put tariffs and quota around the economy so that Mexican businesses got a reward by selling automobiles at high prices to Mexican citizens, and other goods and services. But then everybody moved to Mexico City, so they could be close to the government and have some influence over who got the license to import capital goods from abroad and what the tariffs and quotas were set at. And everybody became preoccupied with government planning as opposed to the production of value through creating a better mousetrap or a higher quality automobile. So central planning sounds like a good idea, but it's go corruption problems, it's got influence problems and it's got information problems. How does the central planner get the information that he or she needs to make this system work better?
Now, the World Bank and the International Monetary Fund are two governmental organizations that were created in the Bretton Woods Agreement in 1944 that began the modern period of international trade after the World Wars. The International Monetary Fund makes loans to developing countries that run to run trade deficits, so that they can afford to import capital goods and improve their technology and improve their productivity at critical junctures in their economic development. The World Bank invests directly by lending for projects, like dams and roads and bridges, which help improve the infrastructure of developing economies so that their markets can work better. These two institutions are the subject of a lot of hot debate these days, because if you're lending in developing countries, you are influencing the course of events to the extent that some of these projects have had disastrous environmental consequences, or to the extent that they are not good for the conditions of the poorest worker in these countries, as perceived by certain Western critics. Then the World Bank and the IMF are going to come under attack for how their policies may actually keep countries in poverty or benefit certain elites at the expense of poor workers. But this is something you read about in the newspaper and you'll have to form your own judgments about whether the policies followed by these two institutions are actually helping or hurting.
So, think about the cycle then. Anything that encourages people to save more, anything that pumps up demand, anything that encourages investment and increases productivity is going to help countries get out of this cycle. But a lot of the specific policies that governments use to try to pull their economies out of the cycle of poverty have counterproductive effects. They reduce productivity, they reduce the return on resources, they discourage savings or they discourage demand and, in so doing, they don't help the economy, they hurt. But anything that actually helps this flow to work better, anything that breaks the cycle of poverty is going to, in the long run, be better for the people whose livelihood depends on this economy.
Productivity and Growth
Emerging Economies
Policies to Promote Growth Page [2 of 2]

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