Production and Economic Growth: Global Growth and Productivity

Outline of the Unit

1. Economic growth around the world
2. Productivity and its determinants
3. Economic growth and economic policies
4. The sustainability of the world's economic growth

References: Mankiw and Taylor (2020), ch.21; Krugman, Wells and Graddy (2013), ch.13.

Outline of the Unit

1. Economic growth around the world
2. Productivity and its determinants
3. Economic growth and economic policies
4. The sustainability of the world's economic growth

References: Mankiw and Taylor (2020), ch.21; Krugman, Wells and Graddy (2013), ch.13.

Importance of Per Capita Income Growth

Per Capita Income Growth Benefits

• Key for the population economic well-being
• Helps reduce poverty
• Can reduce inequality

Growth Rates

Per Capita Income Growth Dynamics

• Per capita income grows exponentially
• Compound interest

yt=yo(1+ g t 100 yo = per capita income in period 0 yt = per capita income in period t g = Average Annual Growth Rate over t periods expressed as a percentage:

Solving for Growth Rate (g)

• Solving for g:

g = I( yt yo 1/t -1 .100

Growth Rates and Income Differences

Average Annual Growth Rate Formula

g = yt yo 1/t -1 .100

• Per capita income grows exponentially (not linearly)-> even a small difference in the growth rates (g) can create large differences in per capita income over time

yo = 100
t = Years
g = 5%
g = 5,5%
30
432.2
498.4 -> +15%
60
1,897.9
2,484.0 -> +33%
90
8,073.0
12,380.8 -> +58%

140- 128 - GDP. pc 120 100 80 64 60 40 32 16 20 8 4 2 0 1 2 3 4 5 6 7

Differences in Historical Growth Rates by Country

Country Growth Rate Comparison (1870-2008)

Country Period Initial real GDPpc Final real GDPpc Average annual rate of growth Japan 1890-2008 1,504 35,220 2.71 Brazil 1900-2008 779 10,070 2.40 Mexico 1900-2008 1,159 14,270 2.35 Germany 1870-2008 2,184 35,940 2.05 Canada 1870-2008 2,375 36,220 1.99 China 1900-2008 716 6,020 1.99 USA 1870-2008 4,007 46,970 1.80 Argentina UK 1870-2008 4,808 36,130 1.47 India 1900-2008 675 2,960 1.38 Indonesia 1900-2008 891 3,830 1.36 Pakistan 1900-2008 737 2,700 1.21 Bangladesh 1900-2008 623 1,440 0.78 Real GDP in 2008 $

• Large differences in growth rates across countries
• Some of the poorest nations in 2008 were even poorer than the United States was in 1870
• Some "economic miracles," but large changes in a country's position are uncommon ("poverty traps")
• Growth rates vary considerably across time and countries
• Small growth-rate differences -> large income differences in the long run (e.g. Japan and Canada vs. UK or Brazil vs. Bangladesh)

1900-2008 2,293 14,020 1.69

Income, Poverty and Inequality

Key Differences

• Difference:
• Extreme Poverty: %population living with $2.15 or less per day
• Inequality: Differences between the rich and the poor
• How GDP c affects poverty?

Data shows that (GDP . tends to _ poverty

Income and Poverty

Extreme Poverty vs. GDP per Capita (2019)

Africa Mozambique Asia Central African Republic Europe Zambia North America 60% Oceania South America Rwanda Niger 50% 1:4B 600M 40% Eswatini Lesotho Nigeria 30% Ethiopia Ghana South Africa Benin Djibouti India Botswana Senegal Bangladesh 10% Pakistan, Philippines China United States Kiribati Kyrgyzstan. Tunisia 0% $1,000 $2,000 $5,000 $10,000 $20,000 $50,000 $100,000 GDP per capita Share in extreme poverty Tanzania Zimbabwe Circles sized by Population (historical estimates) 20% Mali Luxembourg 70% Data source: World Bank Poverty and Inequality Platform (2023); World Bank (2023)

Income, Poverty and Inequality

Income's Effect on Inequality

How income affects inequality within a country?

• Richer countries tend to be less unequal
• but the link is not so clearcut

Inequality (within a country) and Income

Income per Capita and Inequality (Gini Coefficient)

. Income per capita and inequality within countries: Gini coefficient and GDPpc 70.000 O Noruega The Gini coefficient (G): measures inequality in the distribution of income (or wealth) 60.000 Suiza · G = 0 -> maximum equality O Irlanda 50.000 Holanda GDP per capita ($ PPA2011) Suecia . Alemania O Islandia 40.000 Reino U. Corea S. . España 30.000 Portugal Rusia . Croacia Grecia R2 = 0,1982 20.000 Irán · · Argentina Brasil China O O · Colombia 10.000 Ucrania Sudáfrica India Namibia 0 0,20 0,25 0,30 0,35 0,40 0,45 0,50 0,55 0,60 0,65 Fuente: Banco Mundial (WDI)

GINI Coefficient (average 2010 - 2017)

• G = 1 -> maximum inequality

EEUU Countries with higher income per capita tend to be more equal

Income and Inequality

Evolution of Internal Inequality

• Growth can help reduce poverty and inequality (up until 1980s)
• However, since the 1980s, internal inequality in many countries has increased or, at best, has remained the same.
• In some of the largest economies (the US, China, India and the UK) inequality has increased
• In European economies or Japan it hasn't changed much

Inequality within a Country

Evolution of Inequality: Top 1% Income Share

Percentage of total income obtained by the top 1% 1929 Start of Great Depression 1929 Start of Great Depression 1918 End of WWI 1945 End of WWII 1973 End of golden age of capitalism 2008 Start of global financial crisis 1918 End of WWI 1945 End of WWII 1973 End of golden age of capitalism 2008 Start of global financial crisis 30 Income share of the top 1% (%) 25 25 Germany · US · Japan 20 South Africa 20 · Italy · Argentina · France . UK · Sweden 15 15 · Netherlands Denmark 10 5 0 0 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Year Year Source: The Economy (CoreEcon)

Income share of the top 1% (%)

• China

1 · India 10 5 30 Increase in inequality in some big countries: U.S., China, India and UK

Income and Inequality

World Inequality (Among Countries)

• Wealth and income distribution is nowadays very unequal among countries
• But it has decreases from 1980s:
• China, India and other emerging economies

Inequality within a Country

Evolution of World Income Distribution

Figure 5 Global income inequality: T10/B50 ratio, 1820-2020 80 Ratio of top 10% average income to bottom 50% average income 1980: average income of the global top 10% is 53x higher than average income of the bottom 50% 1910: average income of the global top 10% is 41x higher than average income of the bottom 50% 40 2020: average income of the global top 10% is 38x higher than average income of the bottom 50% 20 1820: average income of the global top 10% is 18x higher than average income of the bottom 50% 10 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 Interpretation: Global inequality, as measured by the ratio T10/B50 between the average income of the top 10% and the average income of the bottom 50%, more than doubled between 1820 and 1910, from less than 20 to about 40, and stabilized around 40 between 1910 and 2020. It is too early to say whether the decline in global inequality observed since 2008 will continue. Income is measured per capita after pension and unemployement insurance transfers and before income and wealth taxes. Sources and series: wir2022.wid.world/Imethodology and Chancel and Piketty (2021).

World Inequality

World Income and Wealth Distribution (2021)

How unequal is the world distribution of income and wealth? World income and wealth are concentrated in a small percentage of the population (data: 2021) Bottom 50% Middle 40% Top 10% Top 1% 80% 70% 60% Share of total income or wealth 50% 40% 30% 20% 10% 0% Income Wealth InterpretationThe global 50% captures 8.5% of total income measured at Purchasing Power Parity (PPP). The global bottom 50% owns 2% of wealth (at PPP). The global top 10% owns 76% of total household wealth and captures 52% of total income in 2021. Note that top wealth holders are not necessarily top income holders. Income is after pension and unemployment benefits are received by individuals, and before taxes and transfers. Sources and series wir2022.wid.world/methodology

Trade-off Between Efficiency and Equality

Equity in Development

• Current system mainly benefits the richest: development for whom?
• Urgent need to put equity at the center of the development agenda
• Trade-off between efficiency and equity?

Example 1: Unemployment Benefits

• Jefficiency: Jincentives to work or take risks-> \ GDP
• ¡ efficiency: workers have more time to find jobs that better match their skills and preferences -> ^GDP.

Example 2: Redistribution Policy

• Jefficiency: taxes on the rich -> J incentives to work or take risks-> \ GDP
• ¡ efficiency: ¡ human capital and political and social stability

. Is there an optimal level of inequality?

Addressing Key Questions

Now, we will address the following questions: What factors determine per capita income in the long run? What policies foster growth of per capita income? Is the current growth model sustainable?

Outline of the Unit

1. Economic growth around the world
2. Productivity and its determinants
3. Economic growth and economic policies
4. The sustainability of the world's economic growth

References: Mankiw and Taylor (2020), ch.21; Krugman, Wells and Graddy (2013), ch.13.

Productivity

Components of GDP per Capita

Y Y L L working age population population working age population population GDP pc labor productivity employment rate demographic factor

• Productivity: output per worker (or per working hour)
• productivity is increased with:
• more and better production factors per worker
• more efficiency
• Demographic factor:
• E.g., the aging of the population will tend to decrease income per person
• Productivity usually the principal of driver of per capita income, since employment rate and the demographic factor tend to be stable or evolve slowly.

X X

The Production Function and Productivity

Production Function Definition

The production function: Y = AF (L, K, H, N)

• Y = output (GDP)
• A = measures technology and efficiency in using resources
• Production factors: L = Labor; K = Physical capital; H = Human capital; N = Natural resources

, HN L'L )

Determinants of Productivity

• What determines productivity?
• A: State of technology and efficiency
• Factors per worker: KHN L'L'L

Productivity and its Determinants

Physical Capital (K)

• Physical capital (K)
• Stock of equipment and structures used to produce output.
• Private and public (infrastructures).
• Produced factor of production: machinery, warehouses, etc.
• Workers are more productive if the have better tolos
• Investment (I) : increases K Kt = Kt-1 + It - Dt, where Dt = Depreciation

Human Capital (H)

• Human capital (H)
• Knowledge and skills of workers: education, on-the-job training, experience
• Resources (time, effort, instructors) to increase future production