Growth in Rich Countries since 1950

Chapter 10. The Facts of Growth

I. Motivating Question

What Do Economists Know about Growth?

The chapter answers this question from two perspectives. First, it describes the empirical facts about growth across a spectrum of economies in the postwar period, with a brief discussion of growth over a broader time span. Second, it introduces an aggregate production function with constant returns to labor and capital together, but decreasing returns to each input separately. The chapter points out that this production function implies that growth cannot be sustained indefinitely by capital accumulation. Instead, technological progress is required.

II. Why the Answer Matters

Over the course of decades, the effects of output growth on economic welfare dominate the effects of output fluctuations. Understanding growth is of fundamental importance for the world’s poorer economies, many of which have suffered negative per capita growth rates in the postwar period.

III. Key Tools, Concepts, and Assumptions

Tools and Concepts

i. The chapter introduces logarithmic scales for variable plots.

ii. The chapter develops an aggregate production function (modified to include capital) with constant returns to scale and diminishing marginal products.

IV. Summary of the Material

Growth in Rich Countries since 1950

Output per capita provides some measure of a country’s standard of living. However, to compare per capita real output across countries, it is important to use a consistent set of prices for the goods produced in each country. Basic subsistence goods tend to be cheaper in poor countries than in rich ones, and subsistence goods account for a larger proportion of output in poor economies than in rich ones. Unless these price differences are taken into account, a comparison of real GDP per capita will tend to understate the relative real income of poor countries. GDP measures using a common set of prices are called purchasing power parity (PPP) numbers.

In terms of PPP numbers, there are three primary facts about growth in the G-5 economies (France, Germany, Japan, the United Kingdom, and the United States):

i. There has been a vast improvement in the standard of living in these economies over the past 50

years.

ii. The growth rate has decreased since the mid-1970s in all five countries.

iii. Levels of output per capita have tended to converge over time.

The convergence result extends to the OECD countries in general. In principle, this result could be an artifact of limiting attention to countries that have become rich. Looking, instead, at a set of countries defined by their initial output per capita confirms the convergence result for a set of economies broader than the OECD. Not all economies have converged, however.

Date: 2015-02-28; view: 1027