Topic 1 2023 Economic Growth and Development PDF

Topic 1. ITRODUCTION TO ECOMOMIC GROWTH AND DEVELOPMENT  INTRODUCTION Objective of the subject Study of the long-term behavior of the economy explaining what causes the differences between countries What is economic growth? The sustained increase in per capita income W...

Topic 1. ITRODUCTION TO ECOMOMIC GROWTH AND DEVELOPMENT  INTRODUCTION Objective of the subject Study of the long-term behavior of the economy explaining what causes the differences between countries What is economic growth? The sustained increase in per capita income What is economic development? It has to do with improving the income, well-being and economic capacity of people Why study growth and development? Intellectual enjoyment Possibility of finding economic policy measures that help improve the world in which we live  QUESTIONS OF THE SUBJECT Why are there poor countries and rich countries? What triggers economic growth? Can a country grow indefinitely? Why do leading countries change over time? Is there convergence or divergence in the growth path of the countries? Can economic policies be designed that influence economic growth?  THE FACTS TO EXPLAIN There are substantial differences in the economic circumstances in which live the 8,000 million people who inhabit the earth. These differences are showed by different indicators Life expectancy at birth; 62.7 years in low- income countries, 80.8 in high-income countries  THE FACTS TO EXPLAIN In infant mortality, in spending on electricity, in the number of cars per household, in the level of education... It is worth asking where the origin or cause of these differences lies (a question that Adam Smith already asked himself in 1776).  THE FACTS TO EXPLAIN Basically, the cake is bigger, lower class better nowadays than rich people before In any case, between Smith's time and the current one, in all countries, the variables that reflect the level of wealth have changed substantially. In all they have improved, and even in those with lower incomes today the standard of living is higher than what a member of high society in a rich economy could have in 1820. Factors (yellow): In 1960 the world GDP pc was 459,1 $ and in 2021 12,262.9 $, i.e (x30), in ppp in 1990, 9.704$ and 17080,9 in 2021  THE FACTS TO EXPLAIN Another difference is that we work less and less, we have more and more time for leisure. Keynes already predicted something like this, and although this is a hypothesis, maybe with robotization, we will dedicate ourselves to leisure even more.  THE KEY QUESTION In any case, the key question is what is the source of that growth (of that change in the indicators) Will rich countries get richer and richer? Will the poor converge? Are the problems linked to the environment a limit to the problem, or will technological progress solve it?  DIFFERENCES IN GROWTH The first explanation of the differences comes from the measurement of growth This is done basically from GDP: Income or national product: set of goods and services produced during a given period of time Income or production per capita (Y/P) Total GDP vs. GDP per capita  DIFFERENCES IN GROWTH Year 2000 Year 2009 https://www.indexmundi.com/es/da tos/indicadores/NY.GDP.PCAP.PP. CD/rankings https://www.populationpyramid.net /es/población-por-pais/2022/  DIFFERENCES IN GROWTH Critics: GDP is not an adequate indicator of the total amount of goods and services produced in the economy Income distribution is not taken into account. Alternative: Human Development Index (HDI) prepared by the United Nations Development Program (UNDP) (see below)  DIFFERENCES IN GROWTH In order to establish comparisons between countries we have to overcome the obstacle of the differences in currencies and price level. The first is solved by using the dollar as the reference monetary unit. The second is calculating GDP pc in the same unit of measurement exchange rates adjusted for purchasing power parity (based on the prices of a normalized basket of goods and services) must be used. International data source: Penn World Tables (PWT). Latest version (PWT 10.0):  DIFFERENCES IN GROWTH Use the PPP to adjust, for Instance India looks poorer than what it really is. The effect of using PPP on comparisons of market rates Problems of using market exchange rates: Its variations do not have to reflect a variation in the quantity of goods and services produced. The price of goods traded in international markets (relative to those that are not traded) tends to be higher in poor countries than in rich ones. The price of traded goods tends to be the same when they are converted to a common currency at the market exchange rate (law of one price). Consequence comparisons of GDP at market exchange rates underestimate the relative income of developing countries. One of the first differences by countries: 1º) GDP per capita 2º) Rate of Economic Growth DIFFERENCES IN GROWTH RATES The second explanation of the difference between countries is given by the difference in the rate of economic growth Growth rate measurement: The growth rate in two years is given by !"#$ &!" this equation:𝑔 = !" Resoult= Is a proportion, a percentage %  DIFFERENCES IN GROWTH RATES Represent on a linear scale or in a logarithmic scale What is a growth rate? Growth rates and logarithms Graphic representation of a variable that growths at a constant rate (exponential growth): linear scale and logarithmic scale (ratio scale) Ratio scale (% terms) BETTER RATIO SCALE TO REPRESENT Linear scale (absolute terms) PG 23 Year Year  DIFFERENCES IN GROWTH RATES Calculate Xt=100 and Xt+1= 105 We can change the formula to find the average growth rate over several years: Xt+n=Xt*(1+g)n  DIFFERENCES IN GROWTH RATES If Xt y Xt+n are known, we reorder them and we have: !"#$ 1/n g=( !" ) – 1 Calculate g if Xt=100 and Xt+20= 200 G=3,5% Better to use logarithmic scales (ratio) Doubling rule is important Pg 24  DIFFERENCES IN GROWTH RATES To graph the growth of variables over time, it is useful to use ratio scales. With a ratio scale, equal spaces on the vertical axis correspond to proportional differences in the variable represented. In the linear scale equal spaces correspond to absolute differences in the variable  DIFFERENCES IN GROWTH RATES If there is a constant growth rate, the graph on a ratio scale will give rise to a straight line, because the proportion in which the variable changes is the same every year The graph show constant growth data at 3% for 200 years Representación gráfica de una variable que crece a una tasa constante Escala lineal vs. escala logarítmica  DIFFERENCES IN GROWTH RATES A useful mathematical approximation for dealing with growth rates is the rule of 72 This rule is a good approximation to know how long it can take to double the level of growth !" Doubling time ≈ #  GDP per capita in the United States, 1870–2005 You transform income into logarithms GDP per capita in the United States, 1870–2005 (ratio scale)  THE FACTS 1. There are huge differences in per capita income between economies. The poorest countries have per capita incomes that are less than 5% of the incomes of the richest countries. According to 2020 data from (World Bank): Richest Country: Luxembourg $117,846.10 Poorest country: Burundi $771.16 In Burundi they live with 0.65% of the per capita income of Luxembourg In Spain ($37,756) we live with 32% of the per capita income of Luxembourg USA ($63,206) live on 53.6% of Luxembourg's per capita income The growth rate in europe has stabilised or is negative. This make sense because if you come from a low point is easier to grow. Europe is difficult is geographical because we are disapearing, demographic structure. 1. Economic growth rates vary greatly between countries: 2.Rule of thumb: a country growing at g% per year will double its income every 72/g years 3. Growth rates are not constant over time. 4. The relative position of a country in the world distribution of per capita income can change. Countries can change from being poor to being rich and vice versa Distribución de las tasas de crecimiento, 1975-2009  Another important issue is that here we are assuming that the differences between countries are given by their average income levels. In this sense, we could understand that an inhabitant of a country has an income level equal to the average of his country. And that the difference in standard of living between the inhabitant of one country and another is explained by the difference in income between their countries. However, the difference in income within the country also matters. Thus, inequality in the distribution of world income is the result of inequality between countries and inequality within each country. The difference inside the country matters!!! Difference of income btw citizens inside the same country!!! Exercise and names!!! The question is which of the two is more important. The following graph shows the importance of each from 1820 to 1992. As can be seen, since 1820 world inequality has grown (although it grew above all until WWII) As of 1980, world inequality decreases, and the trend is that in data after 1992 The main source of inequality is inequality between countries, which would explain 60% of global inequality In 1820, 87% of inequality was within the country, and since then it has remained more or less constant, and the one that has grown has been the inequality between countries Before the industrial revolution the GDP in countries in the world was the same not big diff. 1820. The source of inequality was due to Industrialisation. As the ecn. growth process due to the industrial revolution, the inequality between countries has heavily increased. After WWI decreased, nowadays the diff. of standard of living is vastly difference (USA vs Burundi). Inequality btw countries. GDP per capita in the United States, the United Kingdom and Japan, 1870–2009 Japan, Spain, South Korea experienced an increase like this. Changes in the growth rate GDP per capita by country group, 1820–2008  THE FRAMEWORK OF ANALYSIS The differences in per capita income of countries are linked to the key variable that defines economic activity and that is production. Specifically, they depend on the amount of output generated. That amount of output generated depends on the accumulation of inputs used to generate the output. inputs= labour and capital (L,K) And the productivity with which those outputs are used. productivity depends on technology also, important to take into account!!  THE FRAMEWORK OF ANALYSIS The fundamental element from which modern economic growth theories are built is therefore the production function: Yt = F(Kt,Lt; Nt) Y: product K: capital stock L: number of workers employed N: natural resources The data allows us to test the theories, that is, it is necessary to contrast the theories with data analysis (econometrics) Sometimes the empirical work can contradict the theory!!! Empirical data Theory data  Possible sources of differences in output per worker The different inputs explains the GDP Different technological levels explain the difference btw different countries GDP  WHAT IS DEVELOPMENT Two quotes to start: “By the issue of economic development we simply understand how explaining the levels of per capita income and its growth rates observed in different countries and over time. This definition may seem short-sighted and perhaps it is, but by looking at income we will inevitably be looking at many other aspects of societies as well, so I would suggest that we hold off on judging the scope of this definition until we have a clearer idea of where it leads. ” RE. Luke (1988)  “We should never lose sight of the ultimate goal of development, treating men and women as an end, improving the human condition, increasing the options of individuals… There would be a unity of interests if there was a rigid connection between economic production (measured through per capita income) and human development (reflected in human indicators, such as life expectancy or the literacy rate, or in achievements such as self- respect, which are not easy to measure). But these two groups of indicators are not very related to each other.” PP Streeten (1994) Compare btw the 2: There is a controversy between development and economic groth and that development means other things (human development: me). Anyways, countries want to be developed in an economic growth sense.  Economic development is the main objective of most countries in the world: the objective would be to improve the income, well-being and economic capacity of the people. But how is it measured? Is development and growth the same? When we think of a “developed” society: 1. Its population is well fed and well clothed. 2. Have access to a whole variety of products. 3. Can afford to enjoy some leisure and entertainment. 4. Live in a healthy environment. 5. There is no violent discrimination. 6. People receive proper medical assistance. 7. People don't have to sleep on the street.  Most of us would accept that a minimum condition of development is that the physical (or material) quality of life is high and that it is evenly extended (not that only a minority does Benefit of these conditions). We could also include political freedoms and rights, intellectual and cultural development, a low crime rate, etc. Is a high level of material well-being accessible to all a necessary condition for other types of progress? Does GDP per capita reflect the material well-being of a country? We all probably accept that development is not just about income, although income has a lot to do with it.  Two visions: Development has a “multidimensional” characteristic: it is also the elimination of poverty and malnutrition; it ishealth an increase in life expectancy; it is access to the sanitation network, drinking water and health services; is the reduction of infant mortality; is greater access to education, etc. it could be that the correlation between GDP and other desired aspects of development is not automatic (or does not exist). The fundamental features of development (health, life expectancy, literacy, etc.) come from the growth of GDP per capita aggregate economic forces have the power to positively influence all other socio-economic aspects.  Is it possible to find a relatively small set of variables perfectly correlated with the multidimensional process of development? Income may not capture all aspects of development, but assuming that no variable can account for the complex nature of development is not very helpful. To believe that development is fueled exclusively by income is taking things too far, but it has the advantage of trying to reduce a large set of issues to a smaller set, using economic theory. So it could be a Good proxy In the article FDI was a good proxy of GDP. What is a proxy?  to the levels of It makes sense to begin by studying what happens to the average levels of economic achievementt (and what are the forces that contribute to the growth of these average levels: GDP per capita) and to analyze the influence of the distribution of economic achievement between the people of a country or region à we must begin with the analysis of the evolution of per capita income and then move on to the distribution of income.  INCOME EVOLUTION AND INEQUALITY We have already seen that not only are there very large differences in per capita income between countries, but also that economic growth rates vary greatly between countries and periods. Three observations: A significant proportion of countries shift in the ranking when long periods of time (several decades) are considered. There appears to be some symmetry between the upward and downward shifts, implying no change in the global distribution taken o as a whole. Still, there are signs that low incomes are very persistent. Countries with low levels of income (Africa) remain the same. Haven't evolved The countries that remain in the top (USA and UK) and bottom (Africa) haven't changed a lot, is an empirical observation.  But differences between countries are not the only cause of inequality: there is also inequality (to a greater or lesser degree) within countries, as we have already seen. If inequality indicators are used (% of income corresponding to the poorest 40% of the population and the richest 20%) and they are related to income p.c., what is observed is: The first indicator (between countries) decreases with income and then increases. The second indicator increases with income (within) and then decreases. Therefore, it seems that inequality within countries Gini index 100 tends to increase among low-income countries and 0 decrease as intermediate income levels are exceeded GDP (KUZNETS CURVE)  THE HDI The United Nations Development Program (UNDP) has published the Human Development Report since 1990. Its objective is to create a single index with some direct indicators of the state of the population in terms of health, education and nutrition. , called the “Human Development Index” (HDI). Precursor: "physical quality of life index" by Morris (1979), composed of three indicators: infant mortality, % of people who know how to read and write, and life expectancy after the first year of life.  Three components of the HDI: Life expectancy at birth: indirectly reflects infant and child mortality. The educational level of the society: it is a weighted average of the % of adults who can read and write (2/3) and a combination of the enrollment rates in primary, secondary and tertiary education (1/3). Per capita income: adjusted from a threshold (about $5,000 PPP in 1992) less weight is given to higher incomes, under the assumption that they have diminishing marginal utility The HDI is calculated by defining how a country's achievements in each component are measured and taking a simple average of the three indicators.  In particular the transformation of a varible in an index between 0 y 1 is used: x - min( x) índice = max( x) - min( x) IDH es la media simple de los siguientes índices: LE - 25 – Life Expectancy Index: LEI = 85 - 25 – Education Index: AL - 0 Adult Literacy Index (2/3): ALI = 100 - 0 CGE - 0 Gross Enrollment Index (1/3): GEI = 100 - 0 GDP - 100 – GDP Index: GDPI = 40.000 - 100  The result is a final figure for each country that takes a value between 0 and 1. It makes no sense to compare the absolute values of the indicator: a figure of 0.90 compared to another of 0.45 does not mean that the first country has well-being that is double that of the second. The rankings based on the HDI are of interest. Also interesting is the comparison of the rankings according to the HDI and according to GDP p.c. The country with the highest HDI out of 191 countries in 2021 is Switzerland with an HDI of 0.962, and the lowest is South Sudan with an HDI of 0.385. Spain ranks 27th with an HDI of 0.905. The countries are divided into very high HDI groups (from 1 to 66 which is Thailand), high HDI from 67 (Albania) to 115 (Vietnam), medium HDI, from 116 (Philippines) to 159 (Ivory Coast), and Low HDI, from 160 (Tanzania) to 191. THE RELATION BETWEEN GDP AND INCOME PER CAPITA The income p.c. (and even equality in its distribution) is not an unequivocal guarantee of success in human development. But at the same time it could be argued that GDP p.c. is a pretty good proxy for most aspects of development. Is this true? It is necessary to analyze how much explanatory power it has compared to other basic indicators. If three developmental indicators are used (life expectancy at birth, infant mortality rate, and % of adults who can read and write), the result is that income p.c. is closely correlated with development, especially among low and middle-low income countries we must start by looking at income p.c. and the causes of its variation (theories of economic growth).  PIB y esperanza de vida en 12 países 90 Esperanza de vida (en 85 Japón años) 80 EEUU 75 México Alemania China 70 Brasil Indonesia 65 India Rusia 60 Pakistan Bangladesh 55 Nigeria 50 $0 $10,000 $20,000 $30,000 $40,000 PIB real per capita, 2002 Relación entre latitud y renta pc  PIB y nivel de alfabetización en adultos Alfabetización 100 Rusia de adultos China Japón EEUU 90 México (% de la Alemania población) 80 Brasil Indonesia 70 Nigeria 60 India 50 Pakistan 40 Bangladesh 30 $0 $10,000 $20,000 $30,000 $40,000 PIB real per capita, 2002 Relación entre renta pc y crecimiento poblacional