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“Economic growth in the global
economy”
• This module is the first half of a course (“Economic Growth and
History of the global economy”) on long run trends in the world
economy
• The part I teach is module 1: “Economic Growth in the Global
Economy”
• My colleague Giovanni Ceccarelli will teach module 2:
“Economic History of the Global Economy”
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Who I am
Francesco Daveri, M.Sc. Oxford (UK); PhD Pavia (Italy)
Research topics: labor markets, growth and productivity issues
Formerly a consultant to Italy’s Ministry of the Economy, the European
Commission (DG INFSO and ECFIN) and the World Bank
(Research Department)
A coauthor of the top-selling book Centomila punture di spillo (2008),
written with Carlo De Benedetti and Federico Rampini.
My latest book is Crescere si può (il Mulino, 2012)
Also a columnist of Il Corriere della Sera and a member of the
Editorial Board of the website LaVoce.info.
Fb page: http://it-it.facebook.com/fdaveri
Twitter: twitter.com/fdaveri
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Readings
• David Weil, “Economic growth”, 2012 (3rd edition; 2007 2nd
edition)
• Specific chapters indicated on the course website together with
the lecture slides and the course syllabus
Office hours: Wednesdays 11-13 and Thu 11-13
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What this course is about
Two mysteries to investigate
Mystery 1: Why are there rich and poor countries in the world
economy?
Mystery 2: Why do some countries become richer and others stay
poor?
Solving these mysteries is important
• Will Africans be as rich as we are today in the – near or distant future?
• Or will Italians be as poor as today’s Africans?
Today:
we only document these mysteries and give some introductory
definitions to be made crystal clear in what follows
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Chapter 1
THE FACTS
TO BE
EXPLAINED
Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley
A world of rich and poor
World population = 6.7 billion, of which
At one extreme, very poor people:
• 866 million with not enough food to eat
• 1 billion with no safe drinking water
• 2.7 billion with no access to health
At the other extreme, very rich people:
• abundant food and good health.
• At times, associated with worrisome rise in obesity (USA,
Michelle Obama campaigning against it)
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Per-capita income differences, this
is our MYSTERY #1
Economists sum up differences in many social indicators through
single indicator: Per-capita income
• Some 20% of the world population earns 60% of total income
• 80% of world pop survives with < 8630 $, less than 700$ monthly
• One billion people barely survive with <1$ per day
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Is there a relationship between GDP and the UN
Human Development Indicator (HDI)? Yes, a very
close one
160
GDP per capita rank
140
120
100
80
60
40
20
0
0
100
50
150
HDI rank
• The correlation between GDP rank and HDI rank=0.95
• GDP per capita is on the average a very good measure of
Welfare!
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Concept revision: Income ≈ GDP
GDP (Gross Domestic Product) is
• A measure of the value of all the goods and services produced in
a country in a given year
May be seen as
• The value of total output at market prices, or
• The value of total income (wages, rents, interest and profits)
earned in a country.
This is why we often interchangeably speak of Gdp as “output” or
“national income”
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GDP: definition
•
“GDP is the market value . . .”
– Output is valued at market prices
•
“. . . of all final . . .”
– It records only the value of final goods, not intermediate goods (the value is
counted only once)
•
“. . . goods and services . . .”
– It includes both tangible goods (food, clothing, cars) and intangible services
(haircuts, house-cleaning, doctor visits)
•
“. . . produced within a country . . .”
– It includes goods and services currently produced, not transactions
involving goods produced in the past. It measures the value of
production within the geographic confines of a country
•
“. . . in a given period of time”
– It measures the value of production that takes place within a specific
interval of time, usually a year or a quarter (three months)
Gdp, Income and Expenditure
GDP, a measure of a nation’s income. It is also – for us economists – the most
reliable measure of welfare
• As we do with individuals, to understand whether an economy is doing well
or poorly, we usually look at the total income that everyone in the economy is
earning
• For the economy as a whole, though, income equals expenditure because:
• Every transaction has a buyer and a seller
• Hence, every euro of spending by some buyer is a euro of income for
some seller
• This equivalence between income and expenditure gives us a variety
of ways in which GDP can be calculated
Graphics of Income = Expenditure
Gdp measures both flows of dollars and flows of
goods & services in a simplified market economy
Revenue (= GDP)
MARKETS FOR
GOODS AND
SERVICES
Goods and
services
bought
Goods and
services
sold
FIRMS
HOUSEHOLDS
Inputs for
production
Wages, rent, and
profit (= GDP)
Flow of dollars
Spending (= GDP)
Labor, land,
and capital
MARKETS FOR
FACTORS OF
PRODUCTION
Income (= GDP)
Flow of goods
and services
Concept revision: levels and growth
rates
1. Growth rate of level of X from t to t+1
• g = (Xt+1-Xt) / Xt
2. Compounded average growth rate (average g, from t to t+n)
CAGR = g = (Xt+n/Xt)1/n-1
This is from the following: if g is the same between period t and
t+n, then:
Xt+n=Xt(1+g)n
From which the formula above of CAGR is obtained
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A method to measure how much
growth matters
The rule of 72: Doubling time of X = 72 / g (where g is growth rate
of X in % points). Very handy rule.
Example 1: If China’s income keeps growing by 9% per year, an
average Chinese will see its income doubled in 8 years.
Example 2: The five stages of market capitalism (so far)
1950-1973: ‘Golden age’, per-capita Gdp up by +3% per year
1973-2005: ‘neo-liberal order’, +1.7% per year
1870-1913: ‘liberal order’, +1.3% per year
1913-1950: ‘wars + interwar period’, +1% per year
1820-1870: ‘early capitalism’, +0.5% per year
Remark: in the “golden age” of mkt capitalism, the doubling time
was 24 years; during early capitalism it was 144 years - quite a
difference!
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Gdp growth, a natural state of affairs (the
US economy, 1870–2009)
Average growth = some 2% per year. US per capita Gdp
doubling every 36 year.
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Club convergence: Faster Gdp growth in the
UK and Japan than in the US has led their
Gdp to converge towards US levels
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Convergence does not hold for all countries
Distribution of 1975–2009 growth rates indicates that
some poor countries grew fast ..
.. While some others did not grow at all. Positive growth is
unfortunately NOT the rule around the world. This is MYSTERY #2
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More recently: the rise of the rest has been
ongoing
The poorest countries in the world have caught up a
little bit
Countries
Gdp pc 2000 $
Avg Growth Gdp pc 2009 $
2000-09 %
Oecd (high per
capita Gdp)
30528
+0.9
32568
Low and middle
per capita Gdp
3287
(gap with Oecd:
9:1)
+4.7
4974
(gap with
Oecd: 6:1)
Low per capita
Gdp
773
(gap with Oecd:
40:1)
+3.5
1055
(gap with
Oecd: 31:1 )
A summary of
geographical growth differences
South-East Asia did well or very well (growth often in
excess of 5%)
Sub-Saharan Africa did poorly (decline rather than
growth)
Middle-East countries benefited from oil shocks, but
short-lived effect on living standards (Oil as a mixed
blessing)
Latin America went from hell to heaven, back and forth a
few times (early 1980s, mid 1990s, early 2000s, what
next?)
Appendix: GDP as a measure of
welfare
To understand whether the average Italian citizen is richer than the
average Chinese we have to compare the two countries’ Gdp
Problem: How do we compare, if Italy’s gdp is in euros and China’s
gdp is in yuans? It’s like comparing apples and oranges -- it can’t
be done
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How to compare Gdp in the US and
India? Two methods
Method 1: use market exchange rates to convert Rupees into US $
(e.g. on Sep 10, 2009: 1$=49 rupees; US Gdp=37.000, India
Gdp=600; so the income differential is 62:1)
Two problems
1. Exchange rates are asset prices and are thus extremely volatile on
a daily basis. This is unreasonable: wealth and poverty do not
fluctuate that much
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How to compare Gdp in the US and
India
Method 2
Starting point: the prices of non-traded goods (haircuts) are usually
much lower in poorer countries. This means that 1$ has
different purchasing power in different countries (higher in
poorer countries)
Method 2: exploit info on lower price of non-traded goods to
construct PPP (purchasing power parity) exchange rates and
use this - and not the market exchange rate - to compare GDPs
across countries
If we do this, the US Gdp is still 37,000 but the Indian Gdp goes up
to 3,000. And the income differential between an average
American citizen and an average Indian citizen goes down to
12.3:1.
Still there, but much much lower !!!
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The Effect of Using PPP or market
exchange rates on Gdp comparisons
Does it make a difference in practice? Yes, a lot for
poor countries. Poor countries are “less poor” with
PPP than with market exchange rates
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Gdp, an imperfect measure of welfare?
Yes, but money buys a bit of happiness
What we learn from this Appendix
Comparing welfare and living standards is important
Not easy to do it in a sensible way
Gdp comparisons based on PPP exchange rates are more sensible
than those based on market exchange rates
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