Lecture 8: Economic Growth PDF

Kosmas Marinakis, Ph.D. Previously in E&S…  Definition of macroeconomics  Measuring GDP production, expenditure, income...

Kosmas Marinakis, Ph.D. Previously in E&S…  Definition of macroeconomics  Measuring GDP production, expenditure, income  Real vs. Nominal GDP Lecture 8 CPI, PPP Economic Growth  GDP flaws  Global inequality  National productivity  Economics & Society © 2019-23 Kosmas Marinakis, SMU Lecture 8 2 1 2 Economic Growth GDPGROWTH Lecture 8 3 4  Economic growth > GDP Growth GDP per capita PPP (2005 Int $) > GDP Growth  Economic growth refers to the increase in a country’s GDP over time 100K Singapore USA  The growth rate is the percentage change in GDP from one period to another: Germany 80K UK 𝐺𝐷𝑃 𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ Luxembourg 𝐺𝐷𝑃 Ireland 60K Greece  Over the last 2 centuries, GDP around the world tends to increase: Malaysia  There are some short-run fluctuations China 40K India  The long-term trend is clearly increasing.  In this lecture, we will focus on the long-term trend of GDP 20K 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 © 2019-23 Kosmas Marinakis, SMU Lecture 8 5 © 2019-23 Kosmas Marinakis, SMU Lecture 8 6 5 6 Growth is not linear > GDP Growth Growth rate GDP pc PPP (2005 Int $) > GDP Growth  If GDP grows at an approximately constant rate 20% new growth builds on top of past growth and its effects compound 15%  Thus, the increase in GDP is exponential: Growth / year 1% 3% 5% 10% 10% years for GDP to double 71 years 25 years 15 years 8 years years for GDP to triple 112 years 38 years 24 years 13 years 5% Singapore  Slim differences in growth rates translate into large GDP gaps after years:  A GDP of 100 with yearly growth 2% becomes 216 after 40 years 0%  A GDP of 100 with yearly growth 3% becomes 316 after 40 years -5% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 © 2019-23 Kosmas Marinakis, SMU Lecture 8 7 © 2019-23 Kosmas Marinakis, SMU Lecture 8 8 7 8  Average annual GDP growth (2005 $) > GDP Growth World distribution of average growth rates > GDP Growth Total GDP pc GDP pc Annual Countries Includes Guatemala, 1960 2010 Growth Iran, United States 15,398 41,365 2.00% 35 Mexico Includes France, UK 11,204 34,268 2.26% 30 Spain, Includes France 10,212 31,299 2.27% Ghana, UK, 25 Kenya, USA Spain 6,316 27,332 2.97% Rwanda Includes Greece 534 26,918 8.16% 20 Ireland, Japan South Korea 1,656 26,609 5.71% 15 Includes Haiti, Includes Singapore 4,383 55,862 5.22% Central African Botswana, Includes 10 Republic, Singapore, China 772 7,746 4.72% Nicaragua China, Malaysia, S. Korea India 720 3,477 3.20% 5 Includes Thailand D.R. Congo Haiti 1,513 1,410 −0.14% D. R. Congo 696 241 −2.10% 5% Income © 2019-23 Kosmas Marinakis, SMU Lecture 8 9 © 2019-23 Kosmas Marinakis, SMU Lecture 8 10 9 10 Sustained vs. Catch-up growth > GDP Growth  There are 2 entirely different processes of economic growth: 1. Sustained growth: sourced in the country’s own advancement:  From technological innovation and development in human capital  Those grow slowly but can keep improving forever. 2. Catch-up growth: due to technological spillovers from more developed countries: THEHISTORYOFGROWTH a) Because of abundance of local underutilized human capital b) Because of influx of foreign investment c) Because of supporting foreign investment by developing infrastructure and improving local efficiency of labor.  Not all economies in the world were able to experience catch-up growth © 2019-23 Kosmas Marinakis, SMU Lecture 8 11 11 12  Growth before the 1800s > History of Growth Malthusian limits to growth > History of Growth  Before the modern times, economies did not exhibit sustained growth  In 1798, Thomas Malthus published his theory about fertility  Babylon, Egypt, ancient China, ancient Greece, Persia, Rome, Venice, fertility: the number of children per woman experienced prolonged periods of prosperity  Malthus observed that fertility would adjust so that income per but yearly growth of output was minuscule and could easily come to an end capita would always remain close to the subsistence level  There are 3 reasons for the lack of sustained growth before the 1800s:  When GDP pc climbed above the subsistence level, people 1. The pace of technological change was much slower than today would use it to have more kids, lowering GDP pc back to subsistence even till recently, children was the main source of cheap labor for the family 2. New wealth was claimed by the few and was rarely put in productive uses  When the GDP pc fell below the subsistence level, famine, child mortality or war 3. Leaders did not aim to lift people out of poverty would decrease the population, increasing GDP pc back to subsistence © 2019-23 Kosmas Marinakis, SMU Lecture 8 13 © 2019-23 Kosmas Marinakis, SMU Lecture 8 14 13 14 Breaking away from the Malthusian cycle > History of Growth The Industrial Revolution (1760) > History of Growth  The Malthusian model was a good representation for population till the 1800s  The Industrial Revolution started in Britain from textile manufacturing still is for non-human populations (e.g. locust swarms, wild rabbits, pigeons, rats)  It was the first time in history when technology and science were used in  Before 1800, most labor was employed on the production of necessities production in such a coordinated manner  After 1800, technology freed a large portion of workers from the production of  Most developed countries today, were actively part of the Industrial Revolution necessities allowing them to move to other more productive sectors: 250 years ago  This boosted economic growth to unprecedented levels US, UK, Germany, France, The Netherlands, Belgium, Canada, etc.  Caused the demographic transition to the urban economy as we know it today.  The wealthy countries of the future will be the ones that invest in R&D today  Modern families did not rely on the labor of children for prosperity:  Children turned from assets of a family, to liabilities  The “large family” ideal was displaced by a “smart family” model.  Technology enabled humanity to break away from the Malthusian cycle © 2019-23 Kosmas Marinakis, SMU Lecture 8 15 © 2019-23 Kosmas Marinakis, SMU Lecture 8 16 15 16  Internal video In this video I talk about the 5 factors that affect the prosperity of nations but mostly are out of their control: Climate and Ecology, Geography, Culture, Institutions and History and Luck. CAUSESOFPROSPERITY © 2019-23 Kosmas Marinakis, SMU Lecture 8 39 38 39 External video A short but really interesting video on why Africa is still poor and the effect of “End Poverty in Africa” initiatives from the wealthier parts of the world. Thank you! (you are welcomed to stay for consultation or discussion) © 2019-23 Kosmas Marinakis, SMU Lecture 8 40 40 41  WARNING! The slides in this handout are created with the intention to serve a visual aid for the audience during the live presentation of the material in the lecture. As such, they are not designed to be standalone reading material and should be used strictly as reference, side by side with notes taken in the lecture. Studying solely from the slides is not recommended and might in some cases mislead those who have not attended the relevant lecture. Less than 20% of tasks in test and exam can be answered solely from the slides. 42