Economics and Growth: South Korea Insights

Development Economics 1

• Lecture 1 covered the facts of economic growth.
• The lecture explored why some countries are significantly richer than others.
• A fundamental comparison was made between economic growth and economic development.
• The presentation showed a historical example of a poorer country, highlighting the dramatic changes in living standards due to economic growth.
• Lecture 1 also outlined a plan for further study of economic growth throughout the world.

Introduction

• The text describes questions about why some countries grow faster than others.
• It contrasts economic growth with economic development, emphasizing different criteria.

Introduction

• Example of a country with low life expectancy
• High rates of infant mortality
• Most households lack basic amenities (electricity, refrigerators, telephones, cars)
• The aim of the exercise was to identify the country.

The Power of Economic Growth

• The U.S. has undergone a remarkable transformation in a century.
• New amenities: electricity, cars, smartphones; and advances in healthcare, family planning.
• The great financier Nathan Rothschild's life expectancy in the mid-1800s.
• Modern standards of living are a relatively recent phenomenon.

Plan

• The structure of future study sessions outlined.
• The focus on growth patterns of the most developed countries.
• Discussion of the characteristics of those catching up in economic growth.
• Identifying the factors driving or inhibiting development across countries.
• The lecture presented a specific referenced work.

Growth pattern

• The U.S. economy has remarkably steady growth rate for more than a century.
• Economic growth beginning in the mid-1800s to 2014.
• The significant decline in income associated with the Great Depression.
• The U.S. economy recovered and sustained growth after the Great Depression.
• Growth patterns were somewhat varied before and after the period of the Great Depression.

Growth pattern (Cont.)

• A table demonstrated the stability of U.S. growth rates.
• Evidence showing that growth rates were roughly stable for the U.S. from 1870 to 2007.

Growth pattern (Cont.)

• Growth averaged 1.76 percent between 1870 and 1929 and 2.23 percent from 1929 to 2007.
• A summary of growth averaging between 1900 and 1950 (2.06%) and after 1950 (2.16%).
• A more detailed period breakdown of growth rates, including rapid growth (1950–1973), slower growth (1973–1995), and renewed rapid growth (late 1990s).

Growth pattern (Cont.)

• Sustained exponential growth in living standards is recent.
• A graphic representation demonstrating the growth of living standards over a very long run.
• The living standards that have doubled between the years 1 and 1820.

Growth pattern (Cont.)

• Living standards were generally stagnant for a long period.
• A summary of Malthusian diminishing returns.

Economic development

• Questions to explore the factors behind differences in economic development among countries.
• The use of a production function to analyze the sources of those differences.
• To discuss inputs versus productivity in a production function.
• A discussion of the significance of rules and institutions.
• To examine the idea of "catch-up" growth.

Economic development (Cont.)

• How history shows the large impact of institutions in economic success.
• Example illustrating the impact of institutions in economic success: North and South Korea.

Economic development (Cont.)

• A visual representation of North and South Korea at night to compare their development.
• Similar examples from other historical occurrences.

How growth is spreading across countries

• The spread of growth over the very long run occurred at various times.
• Various countries' GDP per capita relative to the rich nations was comparatively stable before 1600.

How growth is spreading across countries (Cont.)

• The data show modest differences in GDP per capita between countries prior to the year 1600.
• Data from 1300 show different levels of GDP per capita among countries.
• The poorest countries in 1950 had a near minimal income (around 300 dollars).

How growth is spreading across countries (Cont.)

• The ratio of income in the richest country to the poorest was approximately 5 times in 1300.
• The growth story since 1870 from a relative perspective (GDP per person in the U.S.).
• The heterogeneity of country experiences since 1870 from a relative perspective.

How growth is spreading across countries (Cont.)

• A graph plotting GDP per person for various countries relative to the relative wealth of the United Kingdom in their initial year.
• Japan, despite past growth, has fallen in relative income to the U.S. since 1995.
• The experience of Sub-Saharan Africa in the last half-century relative to the U.S.
• A figure plotting GDP per person (U.S. = 100) for several countries since 1980.
• Japan's peak income relative to the U.S. was 85 percent in 1995. The growth of China and India are also evident in the graph.

How growth is spreading across countries (Cont.)

• A graphic representation plotting GDP per person, 1960 and 2011, for 107 countries.
• Countries scatter around a standard line, indicating no systematic pattern.
• The mid-income countries cluster above the 45-degree line.

How growth is spreading across countries (Cont.)

• A summary of the data plotted in a 100-country sample.
• The standard deviation of the log of GDP per person is plotted.

How growth is spreading across countries (Cont.)

• The ratio of GDP between the 5th richest and 5th poorest countries over time from 1960 to 2011.
• Some countries' growth slowed down after 1960.
• The rates of poorest countries relative to the U.S. increased after the 1990s.

How growth is spreading across countries (Cont.)

• A graph summarizing the growth rate of 107 countries since 1960.
• The standard deviation of the log of GDP per person.
• The ratio between the 5th richest and 5th poorest country since 1960.

How growth is spreading across countries (Cont.)

• Historical trends in the widening of the world income distribution between 1960 and 1995.
• The stabilization of those trends in the last few decades, as evidenced, for example, by looking back at the income gap between countries in 1960 and 2011.
• Comparison figures for the poorest countries over different time periods.

Economic development (Cont.)

• A graphic representation showing the spread of growth across countries' GDP per capita over the 1960-2010 period.
• A chart illustrating how growth is spreading across countries.

Introduction (Lecture 2)

• The presentation outlines how to measure an economy.
• The inclusion of specific elements and exclusions in the measurements.
• The presentation offers a comprehensive view of the issues related to aggregate economic measurements.
• The key reference for this lecture.

What is Gross Domestic Product (or GDP)?

• Definition of GDP.
• Description of GDP from an economic perspective.
• Examples illustrating when GDP values are relevant to be considered.
• What factors are included to arrive at a GDP result.

Measurement of GDP

• Three approaches to measuring GDP: production, expenditure, and income.

The Expenditure Approach to GDP

• The national income accounts, which classify purchases into categories.
• The breakdown of those categories.
• National income identity: Y = C + I + G + NX.

The Expenditure Approach to GDP

• A breakdown of the different components of U.S. GDP in 2012. (data with percentages and per-person values)

The Expenditure Approach to GDP

• How consumption, investment, government purchases (including national defense), and net exports contribute to GDP in the U.S. in 2012.
• How government spending consists of spending on purchases and transfers.

The Expenditure Approach to GDP

• A graph showing the changes in the composition of U.S. GDP over time.

The Expenditure Approach to GDP

• Relative stable shares of GDP (consumption ≈ 65%, government purchases ≈ 20%, investment ≈15%).
• High G during World War II (1945) and Low I in Great Depression (1930).
• Recent trade deficit.

The Income Approach to GDP

• GDP from a national income accounting perspective.
• In other words, GDP equals the aggregate sum of all income earned in the economy.

The Income Approach to GDP

• Breakdown of the U.S. GDP in 2012. (data with percentages and per-person values)

The Income Approach to GDP

• Compensation of employees (including wages and salaries and benefits): approximately 55% of GDP
• Taxes less subsidies on businesses: approximately 7% of GDP
• Net operating surplus of businesses (profits): approximately 26% of GDP
• Depreciation of fixed capital: approximately 13% of GDP

The Income Approach to GDP

• Composition of income in the U.S. economy in 2012: compensation, taxes, profits, and depreciation.
• Explanation of capital and its depreciation.

The Production Approach to GDP

• The concept of double-counting and how to avoid it when calculating GDP.
• Example with a steel producer and automobile manufacturer selling their products.

The Production Approach to GDP

• A conceptual example of new production compared to the use of an already existing product.
• Illustrative example of a construction firm selling a new house and a used-car dealer selling a used minivan.

What is Included in GDP and What's Not?

• GDP only includes transactions in markets (e.g. restaurant bills but not home cooking).
• GDP does not account for the current health of a nation (e.g. life expectancy).
• GDP omits changes in environmental resources (e.g. extraction of oil and natural gas).
• GDP excludes leisure activities.

Measuring Changes in GDP over Time

• Nominal GDP: a measure of output including the effect of pricing and quantity.
• Real GDP: a measure of output adjusted for price changes.

Measuring Changes in GDP over Time

• Relationships between GDP value, price indices and inflation.
• Example with 37 cell phones and the price of each at $100.
• Nominal GDP = price index x real GDP

Quantity Indexes: Laspeyres, Paasche, and Chain Weighting

• Descriptions of the Laspeyres index, Paasche index and the Fisher index (chain weighting).
• Using the initial prices to compute changes in real GDP vs. using the final prices to compute changes in real GDP.

Real vs. nominal GDP: an economy with two products

• Nominal and real GDP in a simple economy (2018-2020). (table with various calculations)

Comparing Economic Performance across Countries

• Comparing GDP across countries requires adjusting for differences in exchange rates and relative prices.
• Example illustrating how large China's economy is in relation to the U.S. economy.
• Necessity of using common prices.

Exercise 1 - Basics

• Questions about how GDP changes based on various economic scenarios.

Exercise 2 - What counts as GDP

• Questions about how much GDP changes under different scenarios (details in the exercises).

Exercise 3 - Capital gains

• Questions related to whether capital gains are part of GDP.

Exercise 4

• Questions about calculating GDP for a simplified economy.

Exercise 5 - How large is the economy of India?

• Questions about calculating GDP ratios between India and the U.S. (adjusted vs. unadjusted).

Exercise 6 - Earthquakes and GDP

• Questions exploring the effects of an earthquake on economic well-being and GDP measurements.

Lecture 4: Growth basics

• The definition and meaning of economic growth.
• The explanation of per capita GDP.

A Population Growth Example

• The world population is 6 billion in the year 2000.
• A constant population growth rate.
• The level of the population in a century if the growth rate is 2% per year.

The Rule of 70 and the Ratio Scale

• A formula for calculating the number of years to double the variable.
• How the rule calculates the number of years for the variable to double.

The Rule of 70 and the Ratio Scale

• Using the rule of 70 to demonstrate the effect of population growth over time.
• Explanation on why the ratio scale is useful to understand the growth.

The Rule of 70 and the Ratio Scale

• Implications and applications of the Rule of 70.
• Demonstrations of how to apply the rule of 70.

The Rule of 70 and the Ratio Scale

• The Rule of 70 applied to per capita income and population growth.

Growth in practice

• How much have GDP per capita growth in Taiwan, Nicaragua, and Madagascar changed.

Individual growth

• The graph of world population by per capita GDP.
• The interpretation of graphs plotting various countries' characteristics.

Individual growth

• The general growth rate of per capita GDP for world population.
• The relative changes in income for countries, rich or poor.

Properties

• Growth rates of ratios, products and powers.

Properties

• Explicit elaboration of Rule 1, Rule 2 and Rule 3.

Example

• Application of mathematical rule to an example.

Example

• Detailed discussion of growth rates for production functions.

Exercises

• A series of problems to solve using growth rate rules.

Lecture 5: Growth and production function

• Introduction to economic models, and theoretical models' relationships with data.

The Economy of Shangri La

• Description of the ice cream production function.
• The role of L (labor) and K (capital) in the production function.

An Example

• Calculating output in the ice cream economy.

What is the Name of this Production Function?

• Naming the production function: Cobb-Douglas Function.

Returns to Scale

• Identifying different types of returns to scale.

What is the Standard Replication Argument?

• Explaining how replication can be used to understand and characterize constant return to scale in the production function.

What is the Standard Replication Argument?

• Explaining why returns to scale may not remain constant, given the potential for decreasing or increasing returns.

Very Important Distinction

• Differentiating between overall constant returns and diminishing returns to a particular input.

The Marginal Product

• Explanation of marginal product of capital, using an example from the ice cream economy, and linking it to a concept of diminishing marginal product.

The Diminishing Marginal Product of Capital

• Explanation of the marginal product of capital, taking the partial derivative, in relation to the production function.

The Diminishing Marginal Product of Capital

• Relating marginal product of capital to average product of capital.

The model

• Firms hire workers and rent machines to produce ice cream.
• There are three major markets.
• Analysis of labor and capital markets.

The model

• Breakdown of the market for ice cream, labor, and capital goods.
• Profit maximization in the context of these markets.

The model: General equilibrium

• Model featuring 5 equations with 5 unknowns to calculate capital, labor, and wages.

Interpretations

• Discussing the concept of output per person, and the factors that influence it.
• Explaining how the productivity parameter (A) plays a role in the production function.

Evidence

• Presentation of a graph comparing the U.S. and Chinese production functions and TFP levels.
• Discussion of why the difference in TFP may matter given the level of output per person.

Evidence

• A high correlation between per capita GDP and TFP, regardless of countries.

Understanding TFP Differences

• Discussing human capital, technology, and institutions as sources of TFP differences.

Exercises

• Answers to theoretical questions about returns to scale in production, production functions per person, and other elements.

Exercises

• Exercises involving capital gains, hypothetical changes in the economy, and other scenarios.

Lecture 6: Solow model

• Introducing Solow growth model using a corn farm analogy to explain capital accumulation and economic growth.

South Korea and the Philippines

• Comparing the economic performance of South Korea and the Philippines.

The Solow Growth Model

• Constructing a model of the Solow growth model from the example of a corn farm.

The Economy of Solovia

• Description of the model economy with variables like production functions, capital accumulation and labor force.
• Definition of the terms like investment and resource constraint.

The Economy of Solovia

• Describing how real interest rate is equal to the rental price of capital or return on investment.

Solving the Solow Model

• Explanation of equations relating to the change in capital, net investment, and total production in the Solow model.

The Solow Diagram

• Graphical representation of the Solow model's key relationships.
• Showing the relationship between investment and depereciation.

The Solow Diagram with Output and Consumption

• Extension of the Solow diagram to include output and consumption.
• Graphical representation of the relationship between consumption and investment.

The Capital-Output Ratio

• Explaining the concept of capital-output ratio and its relationship to investment rates in different countries.
• Describing how capital-output ratios in different countries are related to investment rates.

Explaining Capital in the Solow model

• Showing the relationship between investment rates and capital-output ratios.

Economic Growth in the Solow Model

• Identifying how economic growth relates to the long-run in the Solow model.

Economic Growth in the Solow Model

• Explanation of why there is no long-run growth in the Solow model.

Understanding the Steady State Result

• Justification for why the economy settles into a steady state.
• Explanation of why investment equals depreciation in the steady state.

Growth and Transition Dynamics

• Explanation of how the Solow framework is useful in understanding transition dynamics.
• Example of an “experiment” in a hypothetical country (Solovia)

A Permanent Increase in the Investment Rate

• Illustrating the case where a country increases its investment rate in a Solow diagram.

The Response of Output to a Rise in Investment

• Showing how output responds to changes in the investment rate in a Solow diagram and over time.

The Principle of Transition Dynamics

• Summary of how the principle of transition dynamics explains differences in observed growth rates across countries.

Examples: The United States and China

• Use of the Solow model to discuss the economic performance of the U.S. and China.

Per capita GDP in Several Countries

• A graphical representation of per capita GDP over time for several countries.

Growth Rates in the OECD, 1960-2017

• Showing growth rates of GDP per capita across multiple countries over time.

Growth Rates around the World, 1960-2017

• Representing worldwide per capita GDP growth rates.

Investment in South Korea and the Philippines

• A line graph plotting investment rates over time in South Korea and the Philippines, and the comparison with the United States.

What we learn from the Solow Framework

• Summary of the insights from the Solow framework on understanding long-run economic performance for richer and poorer countries.

Questions for Review

• Questions reviewed and discussed to test understanding of Solow's framework.

Lecture 7: Romer model

• Introduction to Paul Romer's ideas contrasted with Solow's.
• Distinguishing between 'objects' and 'ideas'.

Solow and Romer

• Comparison of Solow's and Romer's perspectives on economic growth and their respective limitations and advancements.

Objects versus Ideas

• Distinction between physical objects and ideas/knowledge.
• The idea that ideas can be used by many people.

The Idea Diagram

• Illustrative diagram expressing relationships among ideas, nonrivalry, increasing returns and perfect competition.

Nonrivalry

• Explaining rivalry and non-rivalry in the context of ideas and objects.
• Illustrative examples.

Excludability

• Describing excludability and nonrivalry, and their relationship with property rights.

Increasing Returns

• Example of increasing returns in the context of the development of a new drug to treat asthma.

Revisit our standard Production Function

• Revisiting the production function with knowledge included.
• Explanation of the constant returns to scale in K and L for a given level of knowledge.

Problems with Perfect Competition

• Problem of perfect competition with the notion of increasing returns.
• How this relates to research and development, and the potential for losses.

How to Address Problems with Perfect Competition

• Description of actions firms and governments take to address these issues.

Population Growth in the Solow Model

• Description of a case study on population growth and how it affects the economy in the Solow model.

The Romer Model: Our Corn Farm Again

• Representation of the Romer model, slightly altered from the textbook, focusing on ideas, and technology.

The Key Insight: Nonrivalry

• Using the idea of nonrivalry to describe how ideas contribute to continuous economic growth.
• Explaining how new technology can influence the productivity of workers and lead to sustained increases in output per person.

Where do ideas come from?

• The simplest model of idea growth, where each new person produces one new idea per year.

What is the long-run growth rate of At?

• Calculation of the long-run growth rate for the stock of knowledge (A) given a constant growth rate of ideas.

Growth in the Romer Model

• The growth rate for per capita GDP in the Romer Model.

From IRS to Growth

• Explanation of why the Solow model fails to explain long-run growth and how the Romer model succeeds, stressing the difference between objects and ideas
• Illustrative examples of new ideas leading to increase in per capita income

Example

• Application of the Solow and Romer models in the context of developing technology, especially in mobile phones.

World Growth over the Very Long Run

• A graph displaying the long-term relationship between population growth and per capita GDP.

Combining the Solow and Romer Models

• Summary of how the Solow and Romer models can be combined to explain the frontiers of economic growth and the differences in growth rates across different time periods and countries over time.

Questions for Review

• Review questions about various concepts.

This quiz explores key economic indicators and growth patterns in South Korea from 1960 to 2017. Test your knowledge on sources of efficiency differences, per capita GDP, and technological advancements. Dive into the historical context and educational enrollment statistics to better understand South Korea's economic evolution.