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Emergence of the U.S. as World Leader Lecture by Robert M. Coen Emeritus Professor of Economics Northwestern University Alumnae Continuing Education November 2, 2010 Measuring economic performance GDP = value of final goods and services produced domestically GDP per person -- or per worker, per labor hour, per life Market exchange rates, or purchasing-power-parity rates Comparing commodity bundles across nations Measuring non-market public and private production Real GDP adjusts for changes in general price level Accounting for quality change and new products Other indicators Unemployment Inflation Inequality Extent of business cycles (instability) Health Longevity Environment Freedom Data for 1995 United States GDP N (population) GDP/N $7,415.7 billion 267 million $27,774 Japan 483.22 trillion yen 125 million 3,866 thousand yen Use market exchange rate of 94 yen/$1 to compare: GDP/N $27,774 $41,128 Japan 48% above US! _______________________________________________________________ Big Mac $2.00 340 yen PPP exchange rate is 170 yen/$1 (yen is over-valued) GDP/N at PPP Japan 18% below US $27,774 $22,741 Real GDP/N in Big Macs 13,887 11,371 Data for 1995 United States Japan GDP/N at PPP Japan 18% below US $27,774 $22,741 GDP/E at PPP Japan 23% below US $55,334 $42,838 CONS/N at PPP Japan 38% below US $18,800 $11,691 Life expectancy (years) 77.2 Japan 34% below US in lifetime consumption 81.8 Measuring economic performance GDP = value of final goods and services produced domestically GDP per person -- or per worker, per labor hour, per life Market exchange rates, or purchasing-power-parity rates Comparing commodity bundles across nations Measuring non-market public and private production Real GDP adjusts for changes in general price level Accounting for quality change and new products Other indicators Unemployment Inflation Inequality Extent of business cycles (instability) Health Longevity Environment Freedom Broader Measures of Performance Human Development Index United Nations, Human Development Report HDI is average of three indexes: Life expectancy index Education index = (2/3)*ALI + (1/3)*GEI ALI = Adult literacy rate index GEI = Combined gross enrollment index GDP per capita index Broader Measures of Performance Gallop World Poll Asks people about satisfaction with personal life and nation On a scale of 0-10, from worst to best possible life for you: Where do you feel you stand? Where did you stand 5 years ago? Where do you expect to stand 5 years from now? Same questions for country rather than for self Optimism = outlook for 5 years hence – present See Nestor Gandelman and Ruben Hernandez-Murillo, “The Impact of Inflation and Unemployment on Subjective Personal and Country Evaluations” Federal Reserve Bank of St. Louis Review, May/June 2009 Comparison of Real GDP per Capita with Subjective Measures of Happiness Top 20 Ranked by GDP/N Rank GDP/N Satisfaction Rank Optimism Rank HDI Rank GDP/N Country 2005 Self 2006 Country 2006 Self 2006 Country 2006 2006 1 Norway 45,694 4 1 50 61 3 2 United States 41,870 11 16 38 56 8 3 Ireland 38,659 12 2 31 40 5 4 Singapore 38,441 22 6 42 41 28 5 Hong Kong 38,156 44 17 51 46 22 6 Switzerland 35,444 5 5 59 70 10 7 Canada 34,590 7 7 43 63 3 8 Australia 34,323 9 9 45 72 4 9 Austria 33,450 15 10 44 68 14 10 Netherlands 32,638 3 18 67 71 6 11 Denmark 32,162 1 4 60 57 13 12 Belgium 31,750 8 11 52 69 17 13 Sweden 30,657 6 14 54 62 7 14 United Kingdom 30,276 17 28 41 58 21 15 Japan 29,780 24 31 74 67 8 16 Finland 29,761 2 3 73 65 12 17 Germany 29,548 23 52 68 53 23 18 Spain 29,150 16 19 65 54 16 19 France 28,779 18 32 55 64 11 20 Italy 27,795 19 35 61 66 19 Comparison of Real GDP per Capita with Subjective Measures of Happiness Top 20 Ranked by Self Satisfaction Rank GDP/N GDP/N Country Satisfaction Rank Optimism Rank 2005 Self 2006 Country 2006 Self 2006 Country 2006 11 Denmark 32,162 1 4 60 57 16 Finland 29,761 2 3 73 65 10 Netherlands 32,638 3 18 67 71 1 Norway 45,694 4 1 50 61 6 Switzerland 35,444 5 5 59 70 13 Sweden 30,657 6 14 54 62 7 Canada 34,590 7 7 43 63 12 Belgium 31,750 8 11 52 69 8 Australia 34,323 9 9 45 72 22 New Zealand 24,551 10 8 46 59 2 United States 41,870 11 16 38 56 3 Ireland 38,659 12 2 31 40 25 Israel 22,327 13 30 35 35 43 Venezuela 10,973 14 24 25 9 9 Austria 33,450 15 10 44 68 18 Spain 29,150 16 19 65 54 14 United Kingdom 30,276 17 28 41 58 19 France 28,779 18 32 55 64 20 Italy 27,795 19 35 61 66 44 Costa Rica 10,694 20 27 53 52 Comparison of Real GDP per Capita with Subjective Measures of Happiness Top 20 Ranked by Self Optimism Rank GDP/N GDP/N Satisfaction Rank Optimism Rank Country 2005 Self 2006 Country 2006 Self 2006 Country 2006 53 Dominican Rep 8,159 58 43 1 2 67 Morocco 5,096 71 50 2 1 47 Brazil 9,000 25 45 3 4 54 Jamaica 8,108 33 46 4 38 55 Panama 7,945 32 33 5 6 51 Botswana 8,558 70 25 6 29 57 Colombia 7,127 41 39 7 13 60 China 6,483 66 na 8 na 36 Kazakhstan 12,768 48 21 9 5 64 Sri Lanka 5,329 73 51 10 8 62 Peru 5,734 62 63 11 12 66 Egypt 5,230 57 na 12 na 72 Bolivia 3,577 52 44 13 7 58 Georgia 6,657 75 68 14 3 27 Trinidad &Tob 21,403 42 59 15 55 73 Honduras 3,368 54 64 16 51 68 Indonesia 4,884 61 47 17 14 31 Malaysia 16,481 34 12 18 21 46 South Africa 9,610 51 29 19 17 35 Argentina 13,603 28 20 20 15 Broader Measures of Performance Dashboard Concept Interntional Commission on Measurement of Economic Performance and Social Progress (Joseph Stiglitz, Amartya Sen) Speedometer alone not enough to steer car; need a dozen dials State of the USA Project National Academy of Sciences Multi-faceted, 300 or more indicators arranged by categories Health care legislation calls for new body to administer Key National Indicators System web site Not yet “live” Sources of GDP Growth Growth of factor s of production Land (L), including natural resources Labor (N), adjusted for health, training, experience Capital (K), i.e., equipment, commercial and residential structures More efficient allocation of factors of production Improvements in technology Techniques of production Management methods Marketing and distribution methods New products Sources of Growth in GDP per Capita (GDP/N) N increases through population growth Increases in N alone reduce GDP/N: diminishing returns K increases through saving and investment Increases in K/N increase GDP/N, but less than in proportion Improvements in efficiency through expansion of market (division of labor), competitive pressures, advances in technology Improvements in technology through research, creative activity, entrepreneurial activity Empirically, most GDP/N increase due to improvements in efficiency and technology GDP per Capita of World Leader, bold italic (1990 interternational dollars) Year 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2003 Italy 809 450 1,100 1,100 1,100 1,117 1,499 2,564 3,502 10,634 19,151 West Asia 522 621 590 591 591 607 742 1,042 1,776 4,854 5,899 Netherlands 425 425 761 1,381 2,130 1,838 2,757 4,049 5,996 13,082 21,480 UK 400 400 714 974 1,250 1,706 3,190 4,921 6,939 12,025 21,310 USA 400 400 400 400 527 1,257 2,445 5,301 9,561 16,689 29,037 Leader's Share of World GDP (percent) Year 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2003 Italy 6.1 1.9 4.7 4.3 3.9 3.2 3.8 3.5 3.1 3.6 2.7 West Asia 9.6 10.3 4.2 3.8 3.3 2.2 2.0 1.5 2.0 3.4 3.6 Netherlands 0.1 0.1 0.3 0.6 1.1 0.6 0.9 0.9 1.1 1.1 0.9 UK 0.3 0.7 1.1 1.8 2.9 5.2 9.0 8.2 6.5 4.2 3.1 USA 0.3 0.4 0.3 0.2 0.1 1.8 8.9 18.9 27.3 22.1 20.6 Other Shares of World GDP (percent) Year 1 1000 1500 1600 1700 1820 1870 1913 1950 1973 2003 Asia 72.8 70.6 64.9 65.5 61.8 59.4 38.3 24.9 18.6 24.2 40.5 China 25.4 22.1 24.9 29.0 22.3 32.9 17.1 8.8 4.6 4.6 15.1 India 32.0 28.1 24.4 22.4 24.4 16.0 12.1 7.5 4.2 3.1 5.5 Japan 1.1 2.7 3.1 2.9 4.1 3.0 2.3 2.6 3.0 7.8 6.6 13.7 9.1 17.8 19.8 21.9 23.0 33.1 33.0 26.2 25.6 19.2 Western Europe Source: Angus Maddison, Contours of the World Economy, 1-2030AD China’s Leadership in Technology before 1400 See Joel Mokyr’s The Lever of Riches Examples of China’s technical advances: Wet-field techniques for rice cultivation Advances in other agricultural techniques -- iron plow, fertilizers Tracts and handbooks to disseminate agricultural methods Blast furnaces, iron casting Spinning wheel, driven by central power Hydraulic power, waterwheel Accurate water clocks Maritime technology – compass, large ocean-going junks Paper (money, wallpaper) Wheelbarrow Procelains, lacquers, explosives, pharmaceuticals Horse collar, crossbow Why Did China Fail to Become Europe? Population pressure required increases in agricultural productivity, not manufacturing Chinese philosophy turned inward looking, stressed harmony with nature, not exploiting nature Chinese failed to develop system of formal, deductive logic – no Galileo, Descartes, Newton, or Leibniz Merchants did not rise to power in China; imperial bureaucracy dominant Imperial court halts geographical exploration after 1430 Growing desire of traditional groups (government, e.g.,) in China to avoid social conflicts associated with technological changes Netherlands Leadership: 17th to late 18th century Reasons for success: Modern institutions Land ownership by small proprietors Small nobility No church land Religious tolerance Rational approach to problems Geography - coast; mouths of major European rivers Mercantilist policies Blocked Antwerp’s sea access Captured Asian and Latin American trade from Portugal Entrepôt trade (transshipment, warehousing) Reasons Dutch dethroned: Loss of monopolies in trade in conflicts with France and UK Currency became overvalued Entrepôt trade makes banking center United Kingdom: Late 18th to late 19th century Dutch had highest productivity, but little productivity growth Spurs to UK productivity growth: Higher capital investment than Dutch Promotion of free markets, international competition Technical advances in cotton textiles, iron and steel, steam power, railways Application of scientific principles, but why in UK? See Robert C. Allen, The British Industrial Revolution in Global Perspective Property rights more secure in France Italy and Germany develop science of steam engine Dutch were highly urbanized, higher literacy rate Military demands of Royal Navy create demand for technology Development of patent system High wages, cheap coal, consumer society Reasons UK Dethroned Did not explicitly foster education and technology Capital stock grew slowly; savings available, but foreign investment as large as domestic Diffused growth process to follower countries through free trade, foreign investment, exportof technology Currency became overvalued US: Late 19th century to ? US advantages Abundant natural resources High rates of investment (twice UK in 1890-1950), including public investment in infrastructure and education Large, free domestic market fosters large companies enjoying scale economies, able to fund research Protectionist trade policies, slavery Position strengthened by two world wars Growth Accounting for Leaders Annual Growth Rates (percent) Leader Period GDP per per labor hour Capital per labor hour Tech progress* Dutch 1700-1785 -0.07 na 0 UK UK 1785-1820 1820-1890 0.5 1.4 0.0 0.9 0.5 1.1 US 1890-1979 2.3 2.4 1.5 Source: Angus Maddison, Phases of Capitalist Development * Author’s estimate assuming 1 percent increase in capital per labor hour increases GDP per labor hour by 0.33 percent.