Basic facts on economic growth, sources and causes of growth

1. Introduction to Economic Growth
Kateryna Bornukova
BEROC
March 20, 2012
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2. Introduction
There 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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3. Can we compare GDP’s directly?
GDP is measured in home country currency. Are the exchange rates
enough? 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-income
countries 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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4. Why do we care about GDP?
Figure by MIT OCW
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5. World distribution of income per capita
Figure by MIT OCW
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6. World distribution of income per worker
Figure by MIT OCW
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7. When did countries become so different?
Figure by MIT OCW
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8. Cross-country income differences persist
Figure by MIT OCW
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9. When did the gap emerge?
Figure by MIT OCW
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10. Growth started 200 years ago
Figure by MIT OCW
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11. Investment and Growth
Figure by MIT OCW
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12. Human Capital and Growth
Figure by MIT OCW
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13. Do investment and human capital accumulation cause
growth?
There is convincing evidence that investment in capital and human
capital accumulation are correlated with growth. But are they the
causes of growth?
They are not causes, they are growth itself. Sometimes they are
called proximate causes of growth.
In a good theoretical model economic growth should be accompanied
by growth in investment and accumulation of human capital.
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14. What are the fundamental causes of growth?
luck?
geography?
institutions?
cultural differences?
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15. 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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16. 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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17. The best quote about growth
Is there some action a government of India could take that
would lead the Indian economy to grow like Indonesias or
Egypts? If so, what, exactly? If not, what is it about the
nature of India that makes it so? The consequences for human
welfare involved in questions like these are simply staggering:
Once one starts to think about them, it is hard to think about
anything else.
Robert E. Lucas, Jr. (1988)
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