Global Economic Growth Your Role In This Emerging Phenomenon


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Speaking to a crowd of more than 1,000 students and other members of the University of Texas at Austin community, Dean Tom Gilligan used colorful charts and detailed graphs to explore trends in prosperity and poverty around the world. He explained how gross domestic product (GDP) is used as a measurement tool, how “real GDP” and “GDP per capita” are calculated, and how these figures are used to compare economies across regions, across populations and across the world.

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  • Instructor Note: The size of the circle indicates relative population. Italy has a higher survival rate than the U.S. even though per capita income is larger.
  • GDP per capita today varies enormously among nations
  • Instructor Notes: Important Points: GDP per capita In 1 – 1500 AD—Was about $400–$600 Today, richest countries are over 50 times as wealthy as the poorest countries.
  • Instructor Note: Important Points: In 1950 South Korea and Nigeria had the same per capita real GDP In 1950 Argentina was considerably richer than both Japan and South Korea.
  • Instructor Note: While the diagram clearly indicates that higher investment rates are correlated with higher per capital income, an interesting question is also suggested: The United States and Brazil have similar investment rates, but the U.S. has a much higher per capita income. Two ideas come to mind: (a) The U.S. has been growing rapidly for a longer period of time so Brazil is catching up, and (b) capital may be more productive in the U.S. because of better technology.
  • Instructor Note:
  • Global Economic Growth Your Role In This Emerging Phenomenon

    1. 1. Global Economic Growth Your Role in This Emerging Phenomenon Dean Thomas W. Gilligan
    2. 2. State of Global Poverty <ul><li>World Bank Analysis on Poverty </li></ul><ul><ul><li> </li></ul></ul><ul><li>Significant fraction of humans live in extreme poverty </li></ul><ul><ul><li>This poverty has dire consequences </li></ul></ul><ul><li>Rate at which this poverty is falling varies widely across regions </li></ul><ul><ul><li>Some areas are improving swiftly (e.g., China) </li></ul></ul><ul><ul><li>Some areas are “hard cases” (e.g., Africa) </li></ul></ul><ul><li>Surprisingly, its mostly very good news </li></ul><ul><ul><li>80/20 versus 20/80 ( The Bottom Billion , P. Collier) </li></ul></ul>
    3. 3. Purpose of Tonight’s Lecture <ul><li>Trends in Global Economic Prosperity </li></ul><ul><ul><li>Measuring Economic Prosperity </li></ul></ul><ul><ul><li>Economic Prosperity and Human Well-Being </li></ul></ul><ul><ul><li>Some Facts about Economic Prosperity in the Developed and Emerging World </li></ul></ul><ul><li>Key Determinants of Economic Growth </li></ul><ul><li>Challenges to Economic Growth </li></ul><ul><ul><li>Economic Growth and Income Inequality </li></ul></ul><ul><ul><li>Economic Growth and the Environment </li></ul></ul><ul><li>Your Part in Emerging Global Prosperity </li></ul><ul><ul><li>Great chance to make a BIG difference </li></ul></ul>
    4. 4. Measurement of Economic Prosperity <ul><li>Gross Domestic Product (GDP) </li></ul><ul><ul><li>Value of all goods and services produced and sold through market exchange? </li></ul></ul><ul><ul><ul><li>At a particular point in time? </li></ul></ul></ul><ul><ul><ul><ul><li>Admits dynamic comparisons </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Growth rate computations </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Within a particular location or industry? </li></ul></ul></ul><ul><ul><ul><ul><li>Admits geographic and sectoral comparisons </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Relative market performance </li></ul></ul></ul></ul></ul><ul><li>Fairly controversial (conceptually) </li></ul><ul><ul><li>What does it mean? Are people better off with more active markets? (more later) </li></ul></ul><ul><ul><li>What does it not measure? </li></ul></ul>
    5. 5. Gross Domestic Product (GDP) Expenditure Approach to GDP Accounting: United States, 2008 Source: U.S. Bureau of Economic Analysis National Spending Identity: GDP = C + I + G + (EX – IM) Types of Expenditure Billions of Dollars % of GDP Personal Consumption C 10,057.9 70.51 Gross Private Investment I 1,993.5 13.98 Government Spending G 2,882.4 20.20 Exports EX 1,859.4 13.04 Imports IM 2,528.6 17.73 Gross Domestic Product GDP 14,264.6 100.00
    6. 6. Historical Trends in U.S. GDP <ul><li>How has the U.S. economy grown and its components changed over time? </li></ul><ul><li>The answer requires some caveats: </li></ul><ul><ul><li>Must adjust for changes in inflation </li></ul></ul><ul><ul><ul><li>Let’s use prices in some base year to compute “real GDP” across many different years </li></ul></ul></ul><ul><ul><ul><ul><li>Accounts for GDP changes due to price differences </li></ul></ul></ul></ul><ul><ul><li>Must adjust for changes in population </li></ul></ul><ul><ul><ul><li>Let’s divide GDP by population to compute a “GDP per capita” </li></ul></ul></ul><ul><ul><ul><ul><li>Accounts for GDP changes due to entirely to population growth </li></ul></ul></ul></ul>
    7. 7. U.S. Economy Over Time Source: Economic Report of the President The CAGR of Real GDP Per Capita over the 1967-2007 period was 2%
    8. 8. Geographic Trends in GDP <ul><li>How different are economies over the globe? </li></ul><ul><li>The answer requires a currency standard or conversion to compare GDPs </li></ul><ul><ul><li>One could use existing exchange rates (ERs) </li></ul></ul><ul><ul><ul><li>Biased by relative prices of int’l traded stuff </li></ul></ul></ul><ul><ul><li>One could use exchange rates that represent relatively equal purchasing power across nations </li></ul></ul><ul><ul><ul><li>Purchasing Power Parity (PPP): Currency ratio (i.e., exchange rate) that implies rough equality of buying power across two countries. </li></ul></ul></ul><ul><ul><ul><ul><li>PPPs are typically close but not identical to ERs </li></ul></ul></ul></ul>
    9. 9. GDP Per Capita in Developed World Source: U.S. Department of Labor, Bureau of Labor Statistics
    10. 10. GDP Per Capita in BRIC Countries Source: Organization for Economic Cooperation and Development
    11. 11. Money and Human Well-Being <ul><li>Does Money Guarantee Happiness? </li></ul><ul><ul><li>We know miserable people of substantial means </li></ul></ul><ul><li>Does Money Preclude Happiness? </li></ul><ul><ul><li>If you believe this I volunteer to help </li></ul></ul><ul><li>Might Money Contribute to Well-Being? </li></ul><ul><ul><li>How can it? Where should we look? </li></ul></ul><ul><ul><ul><li>Health outcomes </li></ul></ul></ul><ul><ul><ul><ul><li>Longevity – Does wealth contribute to length of life? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Child Welfare – Does wealth reduce infant mortality? </li></ul></ul></ul></ul><ul><ul><ul><li>Self-Assessed Satisfaction </li></ul></ul></ul><ul><ul><ul><ul><li>Are people with more income happier? </li></ul></ul></ul></ul>
    12. 12. Per Capita GDP and Life Expectancy Source: Maddison, 2007
    13. 13. GDP Per Capita and Childhood Health
    14. 14. GDP Per Capita and Satisfaction
    15. 15. Facts About Economic Prosperity <ul><li>GDP Per Capita Varies Enormously Among Nations </li></ul><ul><li>GDP Per Capita Varies Enormously within Most Nations </li></ul><ul><li>Current high levels of GDP Per Capita are a relatively recent phenomenon </li></ul><ul><li>GDP Per Capita Growth Varies Widely in the Recent Capitalist Epoch </li></ul><ul><ul><li>There have been growth successes </li></ul></ul><ul><ul><li>There have been growth failures </li></ul></ul>
    16. 16. Prosperity Varies Across Nations
    17. 17. Prosperity Varies Within Nations - USA <ul><li>The 90 th percentile in household income is over 11 times that of the 10 th percentile. The 10 th percentile household income is $12,162 in 2007 dollars. </li></ul><ul><li>Net household income adjusts gross income for taxes, capital gains and losses, non-cash governmental transfers, the EITC, employee health benefits and differences in the size of persons per quintile. </li></ul>Sources: U.S. Census Bureau for Gross Income and the Heritage Foundation for Net Income.
    18. 18. High GDP Per Capita is a Modern Event
    19. 19. GDP Per Capita Growth Various Greatly
    20. 20. What Causes GDP Per Capita Growth? Source: Cowen & Tabarrok
    21. 21. Innovation and GDP Growth <ul><li>Technical Knowledge Matters </li></ul><ul><ul><li>Innovations raise labor and capital productivity </li></ul></ul><ul><ul><li>Great inventions over time </li></ul></ul><ul><ul><ul><li>wheel, writing, padded horse collar, mechanical clock, movable type, steam engine, textile manufacturing, network electricity, mass production, transistor, ARPANET, polymerase chain reaction </li></ul></ul></ul><ul><ul><li>Scientific Revolution, 1550-1750 </li></ul></ul><ul><ul><ul><li>Major implications for navigation, understanding of the earth’s environment (e.g., weather, geology, etc.), medicine, and other important disciplines </li></ul></ul></ul><ul><ul><li>Industrial Revolution (textiles, energy, metallurgy) </li></ul></ul><ul><ul><li>Equip per head grew by multiple of 250, 1820-2000 </li></ul></ul>
    22. 22. Organization and GDP Growth <ul><li>Composition Matters </li></ul><ul><ul><li>Organization affects labor and capital productivity </li></ul></ul><ul><ul><li>Important Organizational Innovations </li></ul></ul><ul><ul><ul><li>Accounting (for information and control) </li></ul></ul></ul><ul><ul><ul><ul><li>IT today serves much the same role </li></ul></ul></ul></ul><ul><ul><ul><li>Banking, Capital Markets and Insurance </li></ul></ul></ul><ul><ul><ul><ul><li>To help finance and under-write large-scale enterprises (e.g., shipping and trading companies, railroad lines, mass manufacturing, etc.) </li></ul></ul></ul></ul><ul><ul><ul><li>Nation State </li></ul></ul></ul><ul><ul><ul><ul><li>Reduced fragmentation of political power which </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>facilitated trade and enforce property rights </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>encouraged innovation and protect patents </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Mercantilist commercial policies were restrictive, though </li></ul></ul></ul></ul>
    23. 23. Human Capital and GDP Per Capita
    24. 24. Physical Capital and GDP Per Capita
    25. 25. History and GDP Per Capita Great News! Catch-Up Growth Germany and Japan after WWII China and India today
    26. 26. GDP Per Capita and Corruption Great News! It’s Hard, But We Know How to Fix Corruption
    27. 27. Equality and GDP Per Capita Growth <ul><li>Does Growth Promote Income Equality </li></ul><ul><ul><li>Why might it not? </li></ul></ul><ul><ul><ul><li>Relative returns to skilled and unskilled labor </li></ul></ul></ul><ul><ul><ul><li>Technological substitution of unskilled labor </li></ul></ul></ul><ul><ul><li>Why might it? </li></ul></ul><ul><ul><ul><li>Spread of education reduces wage differences </li></ul></ul></ul><ul><ul><ul><li>Wealth begets charity and progressive taxation </li></ul></ul></ul><ul><ul><li>Yes, with a couple exceptions </li></ul></ul><ul><ul><ul><li>Oil-producing countries of the Middle East </li></ul></ul></ul><ul><ul><ul><li>And, in recent years, the United States </li></ul></ul></ul><ul><ul><ul><ul><li>Up until the last quarter century, income inequality in the U.S. had been falling with its peer countries </li></ul></ul></ul></ul>
    28. 28. A Measure of Income Inequality A
    29. 29. Income Inequality Across Nations Developed Economies Emerging Economies Source: Central Intelligence Agency, 2006
    30. 30. Environment and GDP Per Capita <ul><li>Does Growth Harm the Environment? </li></ul><ul><ul><li>Why might it? </li></ul></ul><ul><ul><ul><li>Developed economies are energy intensive; more pollution and greenhouse gas emissions </li></ul></ul></ul><ul><ul><ul><li>Developed economies use modern technology, including chemical intensive farming </li></ul></ul></ul><ul><ul><li>Why might it not? </li></ul></ul><ul><ul><ul><li>Beyond some level, developed economies use resources more efficiently and demand cleaner air and water for better health outcomes </li></ul></ul></ul><ul><ul><ul><li>Emerging economies find the opportunity costs of pollution mitigation too “expensive;” these economies are focused on basic human needs </li></ul></ul></ul>
    31. 31. Environment and GDP Per Capital <ul><li>Evidence is preliminary and inconclusive </li></ul><ul><li>Cross-Country Comparisons </li></ul><ul><ul><li>Atmospheric concentrations of sulfur dioxide, nitrous oxide, carbon monoxide, smoke and lead from gasoline rise through income levels of around $8,000 and decrease thereafter. The same is true for fecal and heavy metals (e.g., lead, arsenic, cadmium, mercury, and nickel) contamination of rivers. Oxygen in rivers declines with early development but than increases. </li></ul></ul><ul><li>B.M. Friedman, Moral Consequences of Economic Growth </li></ul>
    32. 32. Your Role in This Drama <ul><li>You’re among the less than 2% of the world’s population with a college degree </li></ul><ul><ul><li>Education and Capital contribute to growth </li></ul></ul><ul><li>You understand science and technology </li></ul><ul><ul><li>Innovation and creativity contribute to growth </li></ul></ul><ul><li>You’re organizationally sophisticated </li></ul><ul><ul><li>New methods (e.g., microfinance) contribute to growth </li></ul></ul><ul><li>You’re intolerant of corruption </li></ul><ul><ul><li>Transparency and accountability </li></ul></ul><ul><li>You’re informed, aware and committed </li></ul>
    33. 33. University Lecture Series The University Lecture Series