GEND 201: Civic Mind Chapter 1: Growth, Welfare, and the American Economy Since 1900 height, weight, and life expectancy has increased dramatically - - - Height, weight, and life expectancy stem primary from economic growth, because such growth leads to better diets and cleaner water, to sewage disposal and other health enhancing changes GDP – real gross domestic product o In 1900 $0.5 trillion (in 2005 dollars) o In 2011 $13.3 trillion (in 2005 dollars) GDP per capita=GDP/Population o In 1900 $5,557 (in 2005 dollars) o In 2011 $42,671 (in 2005 dollars) o Almost 8 times higher Real GDP grew at 2% per year Rule of 70 - If something is growing at 1% it will take 70 years for it to double Formula # of years to double = 70/growth rate If economy is growing at 2% it will take 35 years to double If economy is growing at 7% it will take 10 years to double Today “officially poor” are richer than an average American in 1950 and richer than all in 1900 (but top 5%) Poverty level is ¼ of the US average, and it is far higher than average per capita level of income in most of the rest of the world. How to find GDP? Real vs Nominal GDP Nominal GDP – the production of goods valued at current prices Real GDP – the production of goods and services valued at constant (base year) prices Year 2013 2014 2015 P^a 1 2 3 Q^a 100 150 200 P^b 2 3 4 Calculating Nominal GDP and Real GDP = + Q^b 50 100 150 Nominal GDP is measure in current dollars 2013 = 2014 = 2015 = (1)(100) + (2)(50) = 200 (2)(150) + (3)(100) = 600 (3)(200) + (4)(150) = 1200 = + If 2013 is the base year 2013 = 2014 = 2015 = (1)(100) + (2)(50) = 200 (1)(150) + (2)(100) = 350 (1)(200) + (2)(150) = 500 Calculating GDP deflator = 2013 = 2014 = 2015 = 100 200 100 = 100 200 600 100 = 171 350 1200 100 = 240 500 GDP deflator- a measure of the price level calculating as the ratio of Nominal GDP to Real GDP times 100 Inflation – rise in the overall level of prices Inflation rate – is the percentage change in some measure of the price level from period to the next Can use GDP deflator to find inflation rate in the second year 2 = 2 – 1 100 1 2014 = 171 – 100 100 = 71% 100 2015 = 240– 171 100 = 40% 171 Case study) Is GDP a good measure of economic well-being? GDH in Bhutan (Gross Domestic Happiness) At the same time the gap between rich and poor in getting wider in the US. Quantile Top Quantile Forth Quantile 1947 43% 23.1 2014 51.1% 23.2% Middle Quantile Second Quantile Bottom Quantile 17% 11.9% 5% 14.3% 8.2% 3.1% Another important measurement is intragenerational income mobility Among all adults in the USA they earn 84% more of income compared to their parents. - Moreover, 43% of poor people are stuck at the bottom, and 57% move to the higher quantile 40% of rich are stuck at the top and 8% fall to the bottom Clearly, there is considerable amount of mobility A study with purpose Why should you study economy history? - To better prepare you for the future Provides lessons on nation building and ways to analyze policies and institutions that affect the nation as well as you personally Ex) Cold War and collapse of political and economic systems of the Soviet Union Is future inevitable or can destiny be steered? - The pace of modern economic change is fast and accelerating in many dimensions Nations that have risen from minor economic significance to world prominence (Hong Kong, China, Japan, Republic of Korea) While others fell: Russia in 1990 and Argentina in 2000 Whole New System of international trade and payments (NAFTA and EU) New institutions, laws, and regulations (Clear Air Act 1990, and Welfare Reform Act 1996) The role of government has changed Ex) Taxes from gasoline vs toll roads to pay for road infrastructure Two main tasks: examine societies overall economic growth, and examine what happens to the welfare of groups within the society as economic and political changes occur. The long road out of poverty - - The reality of our distant relatives was utter wretchedness. Except for the few humans everywhere lived in abysmal squalor Read page 9 of the textbook 1993 Nobel Address of Douglas C. North o 1750 was a major turning point on the human existence o Until 1750 people were caught in a food trap (meager yields severely limited energy for all kinds of pursuits, including production o + high rates of diseases and low rate of resistance to them o What happened in 1750 ? Second Agriculture Revolution soon followed by the Industrial Revolution Live expectancy in France in 1800 was 30 years, now it is 82 - Life expectancy in India in 1901 was 25, now it is 64 Prior to 1750 children and infants experienced high death rates globally o 20-25% of babies died before their 1st birthday By 1800 child mortality fell below 20% in the most developed nations (France, US, UK) Currently, It is less than 1% in the developed world, china – 4%, India – 6%, Africa - 9%. Another metric to show that we have come long way from poverty is GDP Real GDP per capita in 1990 dollars Country/Year Western Europe USA World 1000 $427 1500 $772 1700 $997 1820 $1,202 1900 $2,892 1950 $5,513 2010 $21,793 0 $450 0 $566 $525 $615 $1,257 $667 $4,091 $1,262 $9,561 $2,114 $30,491 $7,814 An institutional Road Map to Plenty - There is a hand full of developed countries and the rest of the world has yet to reach high standards of living What steps did Western Europe and Britain take to achieve success? Is there a set of policies and institutional arrangement that a nation can adopt to get rich? Why China is still poor? Nations output is determined by: - - - Its inputs o National resources o Labor force o Stock of capital o Entrepreneurial talent And by productivity of these inputs o (output and services produced by a worker or unit of capital or unit of land) To measure standard of living we rely on output or income per capita, rather than total output To change income per capita productivity has to change: o Sources of productivity advancement Technology Specialization and division of labor Economies of scale Organization and resource allocation Human Capital To explain why some countries grow faster than others we need to examine how different countries apply and adopt these sources of productivity change (depends on political structure, and culture) Ex) Technology – it can be thought as advancement in knowledge that raise output or lower cost o o o Includes both inventions and modifications – innovation Both require basic scientific research, trial and error, and then further research to put it to practice There is a significant risk and cost (the project can fail or someone else may use the idea How are scientists, inventors, businesses, and others are encouraged to pursue high risk research ventures? It depends on laws and institutions Patents laws first introduced in 1789 in the US constitution, provided property rights and exclusive ownership This pathbreaking law spurred creative and inventive activities Institutional determinants that allow modern economies to flourish: - The rule of law, coupled with limited government, and open political participation Rights to private property that are clearly defined and consistently enforced Open, competitive markets with freedom of entry and exit, widespread access to capital and information, low transaction costs, mobile resource inputs, and reliable contract enforcement An atmosphere of individual freedom in which education and health are accessible and valued Discussion: Perspective 1.1 Read page 16 What does AI bring? Job creation or job loss?