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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.