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

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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.

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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

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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.

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What are the fundamental causes of growth?

luck?

geography?

institutions?

cultural differences?

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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

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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?

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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)

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