Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 1 THE FACTS TO BE EXPLAINED Modified for EC 375 by Bob Murphy Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley Facts to Be Explained • Huge Differences In Living Standards Across Countries Today • Immense Differences Over Time in Living Standards • Differences in Economic Growth Rates Across Countries Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 2 Facts to Be Explained • Throughout this course we will shed light on the quesCons of why countries differ in their living standards. • Also we will seek to explain why countries grow or fail to grow over Cme. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 3 Table 1.1 Top Eleven Countries in Year 2009 According to Three Different Measures Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 4 Figure 1.1 The Parade of World Income Source: Heston, Summers, and Aten (2011). Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 5 Figure 1.2 GDP per Capita in the United States, 1870–2009 Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 6 Calculating Growth Rates Growth between two years is given by: xt+1 − xt g= xt 105 − 100 5 Example: g = = = 0.05 = 5% 100 100 Since xt+1 = xt [1+ g] we can roll forward to obtain: xt+n = xt [1+ g] n Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 7 Calculating Growth Rates Rearrange to obtain average growth over n years: 1/n ⎡ xt+n ⎤ ⎢ x ⎥ −1 = g ⎣ t ⎦ Example: 1/20 ⎡ 200 ⎤ g=⎢ ⎥ 100 ⎣ ⎦ − 1 = 1.035 − 1 = 0.035 = 3.5% Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 8 Calculating Growth Rates • Rule of 72: Doubling Cme = 72/g • The Use of RaCo (Logarithmic) Scales: Figures 1.3 and 1.4. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 9 Figure 1.3 The Effect of Using a Ratio Scale Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 10 Figure 1.4 GDP per Capita in the United States, 1870–2009 (Ratio Scale) Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 11 Figure 1.5 GDP per Capita in the United States, the United Kingdom, and Japan, 1870–2009 Sources: Maddison (1995), Heston, Summers, And Aten (2011). Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 12 Figure 1.6 The Distribution of Growth Rates, 1975–2009 Source: Heston, Summers, and Aten (2011). Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 13 Figure 1.7 GDP per Capita by Country Group, 1820–2008 Sources: Maddison (2008), Heston, Summers, and Aten (2011). Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 14 Figure 1.8 World Inequality and Its Components, 1820–1992 Source: Bourguignon and Morrison (2002). Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 15 Growth Before 1820 • World: – 1700-‐1820 0.07% per year – 1500-‐1700 0.04% per year • Western Europe: – 1500-‐1820 0.14% per year • Income differences between countries were very small by modern standards. Factor of 1.5-‐2.0 for rich versus poor. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 16 Growth as Measured from Outer Space Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 17 Measuring and Comparing GDP • Over Time: Familiar approach, use price index to account for inflaCon over Cme. For example, compute real GDP by deflaCng nominal GDP by price index. • Across Countries: More difficult – Market exchange rates fluctuate a lot. – Price of Traded Goods compared to Non-‐Traded Goods is higher in poor than rich countries. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 18 Measuring and Comparing GDP • Exchange rates tend to be such that traded goods prices are equalized across countries. • GDP measured at market exchange rates systemaCcally understates relaCve income of developing countries. • So, construct arCficial exchange rates-‐-‐PPP Exchange Rates. • Use standardized basket of goods and services, both traded and non-‐traded. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 19 Measuring and Comparing GDP • An example (Table 1.2 from text): • Using market exchange rate (1 Richland dollar/1 Poorland dollar): GDP per capita in Richland is 6 Cmes GDP per capita in Poorland. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 20 Measuring and Comparing GDP • Instead, compute PPP exchange rate using basket of goods consumed worldwide: • 1 television to 10 haircuts. • Worth 30 Richland $ and 20 Poorland $. • So, PPP exchange rate is 3 Richland $/2 Poorland $. • Use this to compute value of per capita GDP Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 21 Measuring and Comparing GDP • Poorland’s GDP per capita = 30 Richland $. • This is 1/4 of Richland’s GDP per capita of 120 Richland $. Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 22 Table 1.3 The Effect of Using PPP on Comparisons of GDP Copyright © 2013 Pearson Education, Inc. Publishing as Addison-Wesley 23