Download Chapter 1. Introduction: The Facts of Economic Growth

Introduction
Facts
Chapter 1. Introduction: The Facts of
Economic Growth
Instructor: Dmytro Hryshko
Introduction
Facts
New Directions in Economic Growth
Why are some countries rich and other poor?
Modern treatment starts with Solow (1956, 1957)|the role of
accumulation of physical capital for income creation and
technological growth for sustained economic growth.
Paul Romer|the economics of \ideas" and the role of human
capital.
Our goal is to provide a general framework for understanding
the process of growth and development.
Introduction
Facts
\Summary Statistic"
We will focus on two statistics of the average person's
well-being: income and GDP per worker (productivity
measure ), and income and GDP per capita (welfare
measure ).
They correlate with many other important statistics
measuring well-being: infant mortality, life expectancy,
consumption, etc.
Introduction
Facts
Facts (1)
There is enormous variation in incomes per capita
across countries. The poorest countries have per capita
incomes less than 5% of per capita incomes in the richest
countries.
Fact 1.
Measurement Issue: Incomes in dierent economies should be
converted to the same monetary unit. For ex.: in the beginning of
year t, Yen/$ exch. rate=120, but uctuates over the year. Japanese
income per capita will be higher in terms of U.S. $ if Yen/$ exch.
rate=100. Solution: use PPP-adjusted exchange rates. Example:
\Big-Mac index." One Big-Mac costs $2 in U.S. and Yen 300 in
Japan. Thus, the PPP-adjusted exchange rate is Yen 150/$1.
4
1
I NTR O D U CTI O N: TH E FACTS O F E C O N O M I C G R O WTH
TABLE 1.1
STATISTICS ON GROWTH AND DEVELOPMENT
GDP per
worker,
1997
Labor force
participation
rate, 1997
Average
annual
growth rate,
1960–97
Years
to
double
$40,834
25,264
31,986
29,295
29,396
0.49
0.63
0.46
0.49
0.36
1.4
4.4
2.3
1.9
3.5
50
16
30
37
20
2,387
1,624
1,242
697
3,946
4,156
2,561
1,437
0.60
0.39
0.49
0.49
3.5
2.3
0.4
0.5
20
30
192
146
“Growth miracles”
Hong Kong
Singapore
Taiwan
South Korea
18,811
17,559
11,729
10,131
28,918
36,541
26,779
24,325
0.65
0.48
0.44
0.42
5.2
5.4
5.6
5.9
13
13
12
12
“Growth disasters”
Venezuela
Madagascar
Mali
Chad
6,760
577
535
392
19,455
1,334
1,115
1,128
0.35
0.43
0.48
0.35
⫺0.1
⫺1.5
⫺0.8
⫺1.4
⫺517
⫺46
⫺85
⫺48
GDP per
capita,
1997
“Rich” countries
U.S.A.
$20,049
Japan
16,003
France
14,650
U.K.
14,472
Spain
10,685
“Poor” countries
China
India
Zimbabwe
Uganda
SOURCE: Author’s calculations using Penn World Tables Mark 5.6, an update of Summers and Heston (1991), and the World Bank’s Global Development Network Growth
Database, assembled by William Easterly and Hairong Yu.
Notes: The GDP data are in 1985 dollars. The growth rate is the average annual
change in the log of GDP per worker. A negative number in the “Years to double” column
indicates “years to halve.”
Introduction
Facts
Facts{Contd. (2)
Rates of economic growth vary substantially
across countries.
Fact 2.
\Long" growth rates as geometric averages: For ex., want to compute
the growth rate of y between t (1960) and t + T (1997). Geometric
average growth rate is gt;t+T = (yt+T =yt )1=T 1. Note that
yt+1 = (1 + gt;t+1 )yt ;
yt+2 = (1 + gt+1;t+2 )yt+1 = (1 + gt;t+1 )(1 + gt+1;t+2 )yt ;: : : ;
yt+T = (1 + gt;t+1 )(1 + gt+1;t+2 ) (1 + gt+T 1;t+T )yt . Thus,
(yt+T =yt )1=T = [(1 + gt;t+1 )(1 + gt+1;t+2 ) (1 + gt+T 1;t+T )]1=T .
|
{z
}
1+gt;t+T
Also note that if gt;t+T is small, T1 log YtY+tT gt;t+T . The LHS can be
h i
written as T1 log YtY+tT = T1 log YtY+t+TT 1 YYtt++TT 12 YYt+1
t
= 1 (gt+T 1;t+T + gt+T 2;t+T 1 + : : : + gt;t+1 ).
T
Introduction
Facts
The Power of Growth Rates
Time to double: Assume that y grows instantaneously at a
constant rate g . Then y +1 = e y . Note that this is similar to
assuming that y +1 = (1 + g )y for small g . Thus, y1 = e y0 ,
2
y2 = e y1 = e y0 , : : : , y = e y0 . Assume that current time
is 0. What is the time needed for y0 to double? We want to
solve for t that satises 2y0 = e y0 . Taking logs from both
70 , where g is
sides gives log 2 = gt , or t = log 2 0 7 = 100
expressed in percentage terms.
t
g
t
t
g
g
t
g
t
t
gt
gt
:
g
g
g
Thus, if g = 0:02 (e.g., U.S.), GDP per capita will double every
50 years; if g = 0:06 (e.g., South Korea)|every 12 years. If,
e.g., the dierence in age between you and your grandchildren is
about 48 years, Korean grandchildren will be about 24 = 16
times wealthier than the current generation.
Introduction
Facts
Facts|Contd. (3)
Growth rates are not generally constant over time.
For the world as a whole, growth rates were close to zero
over most of history but have increased sharply in the
20-th century. The same applies to individual countries.
Countries can move from being \poor" to being \rich"
(e.g., South Korea), and vice versa (e.g., Argentina).
Fact 3.
Introduction
Facts
Kaldor Facts
For the U.S. over the last century:
1 The real interest rate (the return on capital) shows no
trend, up or down.
2 The share of labor and capital costs in income, although
uctuating, have no trend.
3 The average growth rate in output per capita has been
constant and relatively constant over time, i.e., the U.S. is
on a path of sustained growth of incomes per capita.