Introduction to Economic Growth

1. Typically, when we talk about growth, the term either refers to the growth rate of
GDP or the growth rate of per capita GDP of a country

2. Growth is perceived to be a long-run phenomenon, while fluctuations are perceived to

be short-run.

3. So when we analyze growth (in a country or across countries) we typically look at

average annual growth rate over a longish period of time (15/20/50 years or more)
trying to identify the trend growth path.

4. It also explains why the theoretical literature often focuses on steady state as
opposed to transition.

Importance of GDP:

The level of material well-being of the citizens of a country are often captured quite
accurately by its per capita GDP. Hence growth of per capita GDP ipso facto implies
better standard of living. Material well-being depends on a variety of other factors,
e.g., health, literacy, life expectancy etc. It is important to check whether these other
factors are correlated with per capita GDP or not
Caveats:

1. A higher per capita GDP does not necessarily mean everybody is better off.

2. Distribution is important.

There exists considerable difference in income among countries.

1. Increase in inequality over time
2. Increase in mean income over time
3. Some countries like India, China, Hongkong, Singapore move from low income to
middle high income
There is considerable movement of countries from low income to high income and vice-
versa.
Some facts about world-wide growth

The world economy started to grow (i.e., exhibited a positive trend in growth rate) only
from around 1820s
The average annual growth rate of world average GDP per capita was 0.04% during 1500-
1700 and 0.07% during 1700-1820.
Even in Western Europe (most dominant economic force at that time) the average annual
growth rate was only 0.14%.
The pace of worldwide growth has accelerated over time.
Between 1820-1870, average world GDP per capita grew at the rate 0.8% per year; between
1870-1950, the rate was 1.1%; and between 1950-2000, the rate was 2.1%

Industrial revolution around 200 years ago puts the West to a path sustained growth.
1. Some countries have negative growth rate
2. Reduction in growth rate over time. Average growth rate reduced over time as some
countries have moved from positive to negative growth rates
3. There are some countries moving from lower to higher growth rate, e.g., Growth
Miracles - Hongkong, Singapore.
Kaldor Facts (1963):

1. Per capita output grows over time, and its growth rate does not tend to diminish.
2. Physical capital per worker grows over time.
3. The rate of return to capital is nearly constant.
4. The ratio of physical capital to output is nearly constant.
5. The shares of labor and physical capital in national income are nearly constant.
6. The growth rate of output per worker differs substantially across countries

Fact 6 accords with the cross-country data that we have already discussed. Facts 1, 2, 4, and 5
seem to fit reasonably well with the long-term data for currently developed countries

Discrete distribution of income can be obtained Histogram where you are measuring income
in horizontal axis and relative frequency (fraction of countries) in vertical axis.

Discrete distribution converges to continuous distribution when class interval of histogram is

very small

Practice plotting histogram and kernel density in R