intro to econ growth
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Introduction to Economic Growth
Kateryna Bornukova
BEROC
March 20, 2012
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 1 / 17
IntroductionThere are huge income differences among the countries.
Figure: PPP converted GDP per capita in 2009, U.S. dollars in 2005 prices
Source: PWT Version 7.0
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 2 / 17
Can we compare GDP’s directly?
GDP is measured in home country currency. Are the exchange ratesenough? No.
If the GDP’s are not corrected for purchasing power parity (PPP),income ratios are exaggerated - Penn effect.
This happens because of Balassa-Samuelson effect: in high-incomecountries prices for non-tradable goods are higher.
How to compute PPP? The simplest index is The Big Mac Index.Other baskets of goods and services.
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 3 / 17
Why do we care about GDP?
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 4 / 17
World distribution of income per capita
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 5 / 17
World distribution of income per worker
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 6 / 17
When did countries become so different?
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 7 / 17
Cross-country income differences persist
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 8 / 17
When did the gap emerge?
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 9 / 17
Growth started 200 years ago
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 10 / 17
Investment and Growth
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 11 / 17
Human Capital and Growth
Figure by MIT OCWKateryna Bornukova (BEROC) Macroeconomics March 20, 2012 12 / 17
Do investment and human capital accumulation causegrowth?
There is convincing evidence that investment in capital and humancapital accumulation are correlated with growth. But are they thecauses of growth?
They are not causes, they are growth itself. Sometimes they arecalled proximate causes of growth.
In a good theoretical model economic growth should be accompaniedby growth in investment and accumulation of human capital.
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 13 / 17
What are the fundamental causes of growth?
luck?
geography?
institutions?
cultural differences?
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 14 / 17
Facts about Growth
There is enormous variation in per capita income across countries
Growth rates went up only 200 years ago
Growth rates vary over countries and over time
Countries go from being rich into poor and vice versa
Growth is correlated with investment in physical capital
Growth correlates with the rate of human capital accumulation
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 15 / 17
Questions about growth
Why are there large differences in income?
Why some countries grow and some stagnate?
Why did sustained growth started only 200 years before?
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 16 / 17
The best quote about growth
Is there some action a government of India could take thatwould lead the Indian economy to grow like Indonesias orEgypts? If so, what, exactly? If not, what is it about thenature of India that makes it so? The consequences for humanwelfare involved in questions like these are simply staggering:Once one starts to think about them, it is hard to think aboutanything else.
Robert E. Lucas, Jr. (1988)
Kateryna Bornukova (BEROC) Macroeconomics March 20, 2012 17 / 17
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