1. Introduction to
ECONOMIC
GROWTH
SECOND EDITION
Charles I. Jones

2. Chapter 1
Introduction:
The Facts of
Economic
Growth
Charles I. Jones

3. What Creates Differences in the Economic Well-Being?

4. Some Preliminary Concepts
GDP
Gross Domestic Product: the market value of all final goods and services produced within a country in a particular year.
South Korea: 1.6 trillion USD
North Korea: 40 billion USD (~2.5% of South Korean GDP)
United States: trillion USD (~10 times South Korean GDP)
China: trillion USD (~75% US GDP)
GDP per Capita: a welfare measure
Is equal to the ratio of GDP to the total population: GDP/L
South Korea: USD
North Korea: 1800 USD (~4.9% of South Korean GDP per capita)
United States: USD (~1.53 times South Korean GDP per capita)
China: USD (~25.4% US GDP per capita)

5. Some Preliminary Concepts
GDP per Worker: a productivity measure
Is equal to the ratio of GDP to the total number of workers.
Since not everybody (e.g. babies) necessarily works, the GDP per worker tends to be larger than GDP per capita.
Labor Force
Number of people who are currently working or looking for work. Some people may choose not to work even if they can. (How?)
Labor Force Participation Rate
Share of the working-age population (>16) that is in the labor force, i.e. the share of people working or looking for work to the total number of people of the working-age population.

6. Some Preliminary Concepts
Growth Rate of GDP
Rule to remember: the derivative with respect to time of the log of some variable is the growth rate of that variable
Growth Rate of GDP Per Capita
Is defined analogously, only the variable of interest is GDP per capita.
Why does it make more sense to think of growth in terms of GDP per capita? Hint: think about fast-growing population.

7. Some Preliminary Concepts
Years to Double
The number of years it takes for a country’s GDP to become twice its current size.
Rule of 70
Suppose the country’s GDP grows at a rate of g=5% per year.
Mathematically, it means for instance that:
In two years the following formula applies:
In N years:
According to the rule of 70, Indeed,

8. A Note on Stylized Facts
What is a stylized fact?
A stylized fact is an informal, verbal description of some phenomenon.
Why do we need stylized facts?
Stylized facts are a concise summary of what we know about economic reality.
Theory and stylized facts
Economists develop their theories in order to explain the observable stylized facts.

9. Introduction to Economic Growth, 3rd Edition
Copyright © 2013, W.W. Norton & Company

10. Stylized Fact #1
There is enormous variation in per capita income across countries. The poorest countries have per capita incomes less than 5% of those in the richest countries.
The size of the economy (GDP) has little to do with wealth (GDP per capita or GDP per worker)
International comparisons are difficult because market exchange rates fluctuate a lot and are subject to speculation
Purchasing power parity (PPP) comparisons are used to solve the comparison problem
If labor force participation rate is low, GDP per worker can be substantially higher compared to GDP per capita (Japan vs France)

11. Purchasing Power Parity Theory
Suppose a hamburger costs $1 in the US
The same hamburger costs ½ GBP in the UK
According to the PPP theory, $1 should buy exactly 1/2 GBP.
A currency is overvalued if it buys more abroad, undervalued otherwise
Excercise: is your currency over- or under-valued?
The idea is, $1 should buy the same amount of goods and services anywhere in the world after conversion according to the going exchange rate
PPP is based on the idea of arbitrage
Most goods and services are not standardized
Many goods and services are non-tradable
Exchange rates fluctuate and are subject to speculation

12. 2/3 of the world’s population lives in countries with less than 20% of the US GDP per worker
China and India account for the bulk of this part of the world’s population, 40%
39 sub-Saharan countries account for 12%

13. Introduction to Economic Growth, 3rd Edition
Copyright © 2013, W.W. Norton & Company

14. Share of the world population with less than 10% of the US GDP per worker decreased
China, India grew fast
South Korea, Hong Kong, Singapore demonstrate fast growth is possible
We want to know why:
Countries differ in their wealth
Countries differ in how fast they grow

15. Stylized Fact #2
Rates of economic growth vary substantially across countries.
Wealthy countries do not always grow fast: US average growth rate only 1.6%
South Korea grew fast, making it a growth miracle: 4.5%
China grew even faster at 5.6%, but it is still relatively poor due to its huge population and a low starting base
Some countries like Zimbabwe or Venezuela experienced negative growth rates
Given enough time, small differences in growth rate can lead to huge differences in per capita incomes

16. Stylized Fact #3
Growth rates are generally not constant over time. For most of history, growth rates were close to zero. Growth rates have increased only during recent decennia. Growth rates change for individual countries as well.
Increasing slope means increasing rate of growth due to log scale
Before 1870 world growth rate is only 0.2%
Rapid acceleration of growth in the 20th century
Some countries have recently increased their growth rates significantly, e.g. China

17. Stylized Fact #4
A country’s relative position in the world distribution of per capita incomes is not immutable. Countries can move from being “poor” to being “rich,” and vice versa.
Argentina:
1800s: one of the world’s richest countries
Natural resources
Foreign investment
Infrastructure
Immigration
1930s:
Per-capita income greater than that of Australia and Canada
10th largest per-capita income in the world
Compare to today’s Kuwait or Norway
2011: per capita GDP $17900, which is only 35% of the US level

18. Stylized Fact #5 (US case)
Real rate of return to capital, r, stays relatively constant over time
Shares of income devoted to capital, rK/Y, and labor, wL/Y, show no trend
Average growth rate of output per person has been positive and relatively constant over time
Return to capital can be approximated by real interest rate on US government debt, which has been relatively constant
Real interest rate = Nominal (bank) interest rate – Inflation
Labor share is around 0.7, capital share in case of no economic profits is equal to 1-Labor Share=0.3
Corollary: capital-output ratio K/Y is constant
In terms of logs, the slope of the GDP per capita growth trend is constant over time

19. Fig. 1.4
In terms of logs, the slope of the GDP per capita growth trend is constant over time.

20. Introduction to Economic Growth, 3rd Edition
Copyright © 2013, W.W. Norton & Company

21. Stylized Fact #6
Growth in output and growth in the volume of international trade are closely related.
Trade volume is the sum of exports and imports
The trade volume has been growing faster than GDP for most countries since 1960s
Countries with relatively large values of trade volumes are called open economies
Some countries crucially depend on trade:
Hong Kong, Singapore, Luxembourg: trade volume >150% of GDP
Korea: 70% (by PPP) or 99% (by official exchange rate)
Production chain in the trade-intensive countries:
Import component parts or unfinished products
Add value by assembling (a car) or finishing a product (e.g. refine crude oil)
Export the finished product

22. In general, there is a positive relationship between GDP growth and the growth rate of trade volume.

23. Introduction to Economic Growth, 3rd Edition
Copyright © 2013, W.W. Norton & Company

24. Stylized Fact #7
Both skilled and unskilled workers tend to migrate from poor to rich countries or regions
Why would skilled labor migrate?
Returns must be higher in the rich countries for skilled labor
However, skilled labor is scarce in poorer regions
Scarcity implies higher returns (think of gold or diamonds)
Why then don’t skilled workers migrate from Korea to the Philippines?

25. Three Main Questions
Why are the world’s countries different with respect to the level of their development?
Solow model: chapters 2,3; chapter 7
What is driving the process of economic growth?
Technological progress: chapters 4 and 5
What explains growth miracles?
South Korea, Singapore, Hong Kong…
Chapters 6 and 7