American Economic History
Introduction and Review
What Is Economic History?
• “An attempt to explain the structure and
performance of an economy over time.”
(North, Structure and Change in Economic
History, p.3)
– Must be able to measure the structure and
performance over time
– Must be able to explain changes
Measurement Issues
• To judge whether the economy is doing
well or poorly, must have a measure of size.
• Before WWII there were no statistics to
measure the size of the whole economy
• Must discuss these issues of measurement
before trying to explain growth.
Gross Domestic Product is the most
commonly used measure
• Gross domestic product (GDP) is a measure
of the income and expenditures of an
economy.
• It is the total market value of all final goods
and services produced within a country in a
given period of time.
• It is also a measure the total income of the
economy.
GDP
• GDP is the Market Value . . .”
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Output is valued at market prices.
Cannot add eggs to cars to oranges directly
GDP is a weighted average
When prices are determined in markets they
reflect the marginal value people place on them.
Measurement of GDP
• Of All Final . . .”
– It records only the value of final goods, not
intermediate goods (the value is counted only
once).
• If a baker buys flour, it is not part of GDP, the bread
produced from it is. If you buy flour in the
supermarket it is part of GDP.
– It is somewhat arbitrary
• Cars are classified as final goods even though most
use them to go to work
Measurement of GDP
• Goods and Services . . . “
– It includes both goods (food, clothing, cars)
and services (haircuts, doctor visits).
• Includes only those goods and services
produced in market
– Not those produced at home
• A women marries her gardener and GDP falls
– Not illegal
• Prostitution is part of GDP in Nevada, not CA
Measurement of GDP
• Produced . . .”
– It includes goods and services currently
produced, not transactions involving goods
produced in the past.
• Selling a used car does not change GNP
Measurement of GDP
• “ . . . Within a Country . . .”
– It measures the value of production within the
geographic confines of a country.
• GNP is a similar measure
– total value of all final goods and services
produced by a country’s citizens regardless of
where produced.
GDP Problems
• What would happen to GDP if number of
women in workforce increased?
– GDP would increase because jobs done outside
the home are counted as part of GDP while jobs
done in the home are not
• Would all the measured increase be real?
– No, jobs were done before, but done outside
the market
• This is important in many historical periods
GDP Problems
• What would happen to GDP, if marijuana
use was legalized?
– GDP would increase.
• Would all the measured increase be real?
– No, some marijuana was grown before but not
counted as part of GDP because it was illegal
• Can you think of a similar historical episode
when this would be important?
GDP per Capita
• GDP per Capita is GDP per person
– GDP/population
– Measure of standard of living
• GDP and GDP per capita can be different
– China vs. Switzerland
• Which measure is best depends on the
problem
– Marketing Rolex watches vs. KFC
Real Vs. Nominal
• Since GDP is value of goods and services, it
depends on both price and quantity
• If GDP goes up how much is from increase
in real output and how much is caused by
increase in prices?
.
Real vs. Nominal
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
• It is important to know what happens to
prices and output.
Real Vs. Nominal
• Nominal GDP values the production of
goods and services at current prices.
• Real GDP values the production of goods
and services at constant prices
Growth Rate of GDP
• How do you calculate growth rate?
• ((GDP2- GDP1)/ GDP1)*100
• Can you tell growth rate by looking at the slope of
the line on the previous graphs?
– No slope is the change in gdp, not the percentage
change
– If you graph the log of GDP, then the slope gives the
growth rate
The slope of the
graph is constant.
Growth rate of
GDP is average of
about 3%.
The exception is
period of Great
Depression.
Looks similar
to GDP.
Average growth
of per capita
income is about
1.5% per year.
Data Problems
• National Income Accounting does not exist
before 1930, so where do these numbers
come from?
• Estimated in various ways
• Earlier in time the worse the data is
• For the colonial period we will look at other
measures, like height by age, mortality
rates.
What do the GDP, GDP per capita
statistics for the US tell us?
• US does not have a very high growth rate or either GDP or
GDP per capita
• With exception of the Great Depression, US growth has
been very constant.
• We will see when we discuss the colonial period that US
standard of living was comparable to European standard of
living from the beginning.
• The result is high GDP per capita relative to the
rest of the world.
GDP, Life Expectancy, and Literacy
Copyright©2004 South-Western
Growth Model
• Once we have described the performance of
an economy we want to explain it.
• Economists often use a production function
to describe the relationship between the
quantity of inputs used in production and
the quantity of output from production.
Productivity
• The inputs used to produce goods and
services are called the factors of production.
• The factors of production directly determine
growth of output.
Production Function
• Y = F(L, K, H, N)
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Y = quantity of output
L = quantity of labor
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the inputs are
combined.
• Technological change causes a shift of the function
Factors of Production
• Labor
• Hours spent working in the market sector
Factors of Production
• Physical Capital
– is a produced factor of production.
• It is an input into the production process that in the
past was an output from the production process.
– is the stock of equipment and structures that are
used to produce goods and services.
• Tools used to build or repair automobiles.
• Tools used to build furniture.
• Office buildings, schools, etc.
Factors of Production
• Physical capital lasts for a long time.
• New capital produced in that year is called
investment
– This is not what most people mean when they
use this term.
• The amount of investment today,
determines amount of capital available in
the future and the growth the GDP
Factors of Production
• Human Capital
– the economist’s term for the knowledge and
skills that workers acquire through education,
training, and experience
• Like physical capital, human capital raises a nation’s
ability to produce goods and services.
• Not all education is equal. Spending on a University
system in a country where a large percent of
population cannot read will not lead to growth.
Factors of Production
• Natural Resources
– inputs used in production that are provided by nature,
such as land, rivers, and mineral deposits.
• Renewable resources include trees and forests.
• Nonrenewable resources include petroleum and coal.
– can be important but are not necessary for an economy
to be highly productive in producing goods and
services. (Japan)
Factors of Production
• Technological Knowledge
– society’s understanding of the best ways to
produce goods and services.
– Human capital refers to the resources expended
transmitting this understanding to the labor
force
– It is a shift in the production function because it
allows more output for the same amount of
input (productivity)
Measuring Productivity
• Input productivity is output/input
– Labor productivity Y/L
– Capital productivity Y/K
• Cause of productivity increase can difficult
to find
– More of another input
– Technological change
Economic Growth
• Economic Growth (increase in real GDP)
can result from
– an increase in the factors of production (more
K or L or N)
– or technological change that increase
productivity
– or institutional change that allow more output
for same amount of input
Input Growth
• Early period of US history, growth comes
from increased usage of factors of
production.
– Real GDP rises because the country utilizes
more labor, increases the training of its
population, and increases its usage of physical
capital.
• Input growth is subject to diminishing
returns
Productivity increase
• Technological change is an important
source of economic growth in modern
times.
Other factors
• Institutions and property rights of an
economy as well as the state of technology
determine the shape of the aggregate
production function
Property Rights
• Property rights refer to the ability of people
to exercise authority over the resources they
own.
– An economy-wide respect for property rights is
an important prerequisite for the price system to
work.
– It is necessary for investors to feel that their
investments are secure.
Big question
• Why does US economy have the set of
institutions that seem to promote growth?
• Why do these institutions change over time
and continue to promote growth?