# Chapter 1 Lecture Notes

```GEND 201: Civic Mind
Chapter 1: Growth, Welfare, and the American Economy
Since 1900 height, weight, and life expectancy has increased dramatically
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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
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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
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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.
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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?
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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?
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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
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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
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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
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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:
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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:
 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
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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:
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The rule of law, coupled with limited government, and open political participation
Rights to private property that are clearly defined and consistently enforced