What is the International Dollar?
Comparison tool for purchasing power parity across countries
What does the ratio of average top 1% income to average bottom 99% income say?
It says that the top 1% have X times the average income in comparison to the bottom 99%
How does the ratio scale work in combination with growth rates?
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
What is the rule of 72?
How long does it take for a country growing at growth rate g to double its income?
The doubling time is roughly 72/g
What are 3 facts about growth rates?
Huge variation in per-capita income across countries
Growth rates vary substantially across countries
Growth rates are not generally constant over time
Why are some countries rich an others poor?
-Level differences
-Different levels of human capital & physical capital
-Different institutions supporting innovation/technology adoption/entrepreneurship
How can you compare two countries?
-Compare GDP and GDP per capita
-Goods and services (GDP) are produced using two inputs (factors of production):
Capital: tools that the workers have at their disposal like machines, vehicles, buildings and other equipment
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
What is the production function?
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
What are possible sources of differences in output per worker?
What are known measures of living standards (1)?
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
What are known measures of living standards (2)?
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
What are Limitations of GDP?
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
What are alternative measures of living standards?
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
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