Economic Growth

Ruffin and Gregory

The real meaning of economic growth:

a. The Industrial Revolution, a time of economic growth, changed the life of the world, and it continues.b. The Great Depression, in the simplest possible language, was a time of negative economic growth.c. The “miracles” of the post-war period-- America, Germany, Japan... were simply times of extraordinary economic growth.

During the Industrial Revolution, beginningin the later part of the 1700s, life changed tremendously

1. People had jobs and children worked.

2. Food availability exploded.

3. Housing, clothing, food became cheaper.

4. Mortality dropped and world population exploded.

Table 1. Per Capita Growth, U.S.

Period Average Annual Growthof Per Capita GDP

1800-1840 0.58%1840-1880 1.44%1880-1920 1.78%1920-1960 1.68%1960-1995 1.85%

Source: Ruffin & Gregory, Ch 26, p. 457.

Productivity:

Labor productivity is output per unit (usually per hour) or labor input.

Capital productivity is output per unit of capital input.

Total factor productivity is output per unit of combined labor and capital input (a“weighted average”).

An example (nontestable) to illustrate how productivity measures can be useful:

1. The antebellum South was a slaveholding economy.2. Were slave plantations more (or less) productive than nonslave farms?3. Why anyone cares: Historians wanted to settle the question “Would slavery have disappeared on its own without the Civil War?4. Why anyone cares: Some African-Americanswould like to dispel the stereotype of the “lazy slave.”

Fogel & Engerman showed in the1970s that the Total Factor Productivityof antebellum cotton plantations was actually higher on the slave plantationsthan on the nonslave plantations.

Table 2 in Chapter 8 Shown in Abbreviated Form.

Range ofYears

Real GDPGrowthon Average

Total FactorProductivity

Proportion ofGrowthExplained byInputs

UnexplainedResidual

1800-1855 4.2% 0.3% 93% 7%

1855-1898 4.0% 0.3% 90% 10%

1899-1919 3.9% 1.7% 46% 54%

1919-1948 3.0% 2.2% 20% 80%

1948-1988 3.2% 1.7% 47% 53%

The "unexplained residual" is probably technological change.

The Effect of Increasing Your Country’sRate of Savings.

This boosts investment in the short runand correspondingly increases the rateof growth of GDP per capita.

However, there is no permanent effect onthe rate of growth--at least not in the verypopular “neoclassical model.”

Endogenous Growth Theory (the other“heavyweight” among the theories)proposes that we will find that the strong desire for profit is what causesand stimulates the rate of growth in percapita GDP.

What works in real life?

1. Increase human knowledge.

Average annual per capita GDP growth against fraction of population in school (logged)

What works in real life?

1. Increase human knowledge.

2. Encourage savings and investment.

Do high saving countries actually grow faster than the others?High Saving Saving Rate Growth Rate

in 1990 1980-1990 Hong Kong 33 5.5 South Korea 37 8.9 Singapore 45 5.7 Thailand 34 5.6 Indonesia 37 4.1Average 5.4Low Saving Philippines 16 -1.5 Nepal 8 1.8 Bangladesh 2 1.0 India 20 3.2 Pakistan 12 2.9 Sri Lanka 15 2.4Average 1.5

What works in real life?

1. Increase human knowledge.

2. Encourage savings and investment.

3. Discourage political instability.

4. Monitor government consumption.

Ave annual growth rate against government consumption.

What works in real life? Finishing the list:

1. Increase human knowledge.

2. Encourage savings and investment.

3. Discourage political instability.

4. Monitor government consumption.

5. Expand international trade.