1. The Facts of Economic Growth

Comparison tool for purchasing power parity across countries

It says that the top 1% have X times the average income in comparison to the bottom 99%

The Linear scale: Equal spaces on the x-axis correspond to equal differences in the plotted variable

The Ratio scale (log scale): Equal spaces on the x-axis correspond to equal proportional differences in the plotted variable

-On a ratio scale, a quantity growing at a constant rate will yiela in a straight line

-Log scales show relative values instead of absolute ones

-The same distance on a log scale shows the same growth rate

How long does it take for a country growing at growth rate g to double its income?

The doubling time is roughly 72/g

1. Huge variation in per-capita income across countries

2. Growth rates vary substantially across countries

3. Growth rates are not generally constant over time

-Level differences

-Different levels of human capital & physical capital

-Different institutions supporting innovation/technology adoption/entrepreneurship

-Compare GDP and GDP per capita

-Goods and services (GDP) are produced using two inputs (factors of production):

1. Capital: tools that the workers have at their disposal like machines, vehicles, buildings and other equipment

2. Labor of workers

Productivity: difference in output that cannot be attributed to differences in inputs

-> Productivity consists of technology and efficiency

Fundamentals: deeper causes of differences in factor accumulation and productivity

A production function describes how the inputs a firm uses are transformed into its output

Y = f(K,L,A)

Y = Output per worker (GDP)

K = Capital

L = Labor

A = productivity

Productivity can be found in A & in the functions that map inputs and outputs

GDP (Gross Domestic Product)

-Total value of all final goods and services produced in a country

-Total expenditure of a country

Y = C + I + G + NE

C = Consumptions

I = Investment

G = Government Spending

NE = Net Exports

Real vs Nominal GDP

-Nominal GDP measures these values using current prices

-Real GDP measures these values using the prices of a base year

Changes in nominal GDP can be due to:

-changes in prices

-changes in quantities of output produces

Changes in real GDP can only be due to changes in quantities

GDP does not take into account:

-happiness and well-being (e.g., life satisfaction, life expectancy)

-non-market activities

-environmental factors

-informal economy

-sustainability of growth

-composition of GDP, i.e. consumption vs military or health spending

2007, EU: Beyond GDP programme

Alternative indicators include:

-World Bank’s Human Development Index

-> Life expectancy at birth, adult literacy rate and school enrolment rates & standard of living (logarithmic function of GDP)

-OECD Better Life Index