THE FACTS OF ECONOMIC

GROWTH
Suggested readings:

Chapter 1 Jones and Vollrath (2013)

Jones, Charles I. (2015). The facts of economic growth. Unpublished manuscript

in preparation for the Handbook of Macroeconomics. (Available at
http://web.stanford.edu/~chadj/papers.html#facts)
Overview
Some data over decades (and centuries)
Long-run versus short-run macroeconomics

Introduction: the importance of economic growth

How to compare the GDP level of two countries
Stylized facts of economic growth:
Differences in GDP levels and in growth rates across
countries and across time
Growth at the frontier: balanced growth
The spread of growth: convergence
Real per-capita GDP in the United States, 1870-2010
35.000
Per-capita GDP (1990 International Geary-

30.000

25.000
Khamis Dollars)

20.000

15.000

10.000

5.000

0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: Own graph from The Maddison-Project dataset,

http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.
Real per-capita GDP in Spain, 1870-2010
20.000

18.000
Per-capita GDP (1990 International Geary-

16.000

14.000
Khamis Dollars)

12.000

10.000

8.000

6.000

4.000

2.000

0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: Own graph from The Maddison-Project dataset,

http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.
Unemployment rate in the United States, 1947-2015

12,0
Annual unemployment rate (%)

10,0

8,0

6,0

4,0

2,0

0,0
1947 1957 1967 1977 1987 1997 2007

Source: Own graph from Bureau of Labor Statistics dataset.

Spanish unemployment rate, 1976-2015

Source: http://www.tradingeconomics.com/spain/unemployment-rate (downloaded

on January 13th, 2016)
Long run versus short run macroeconomics
Examples of long-run macro phenomena:
Economic growth and end level of income per capita over
50, 100 or more years
Average unemployment rate over decades or more

Examples of short-run macro phenomena:

Fluctuations in GDP, consumption and the rate of
unemployment from quarter to quarter, half-year to half-
year or year to year
The basic questions in macro

1. What creates growth and a high level of income

and consumption per capita in the long run? What
determines the long-run rate of unemployment?
What policies promote growth? What policies
permanently decrease the unemployment rate?

2. What creates fluctuations in GDP in the short run?

What creates the variations in the rate of
unemployment in the short run? Can monetary
and fiscal policies stabilize the cycle?
Macroeconomics
Macroeconomics is the study of growth and fluctuations in
aggregate output and related variables, thus:

Macroeconomics aims at explaining trends and fluctuations of

aggregate economic time series for GDP, consumption,
investment, inflation, real wages, interest rates, etc.

The first part of the course will deal with Long-run

Macroeconomics, about economic growth and prosperity in the
long run.
The last part of the course will be dedicated to the Short Run,
especially to the analysis of business cycles.
Introduction: the importance of economic growth
In economics, we often measure prosperity by GDP
per capita.
Higher income leads to higher consumption and/or
higher saving, and higher saving means higher future
consumption. Consumption is positively related to well-
being.
Moreover, higher GDP per capita is often accompanied
by higher life expectancy, lower children mortality,
better education and health, etc.
We study growth in income per capita because a higher
level of income per capita is reached through a higher
growth in this variable.
Introduction: the importance of economic growth
(cont.)
Small differences in growth rates can imply large
differences in levels over long periods:
Growth Rate
-1.5% 0.5% 1% 2% 3% 6%
1900 100 100 100 100 100 100
1950 47 128 164 269 438 1842
2000 22 165 270 724 1922 33930

Growing at an average annual rate of 2% increases output about

7 times in 100 years
Growing at an average annual rate of 3% increases output about
19 times in 100 years
Comparing the GDP levels of two countries

To compare the GDP level of two countries, we need to

express them in the same monetary units.
For this purpose, economists use the so-called purchasing
power parity (PPP)-adjusted exchange rate.
The PPP-adjusted exchange rate allows us to measure the
actual value of a currency in terms of its ability to purchase
similar products in the two countries (example: the Big Mac
index).
In this way we take into account that consumer goods (and
especially services) are much cheaper in less developed
countries.
GDP per capita or GDP per worker?

GDP per capita = GDP divided by total population. A better

measure of welfare: it tells us how much output is available,
on average, for each person to be consumed or saved.

GDP per worker = GDP divided by total labor force. A better

measure of the productivity of the labor force: it tells us how
much output is produced, on average, by each worker.

In this class, we will use the two concepts indistinctively.

Statistics on
Economic Growth

Note: The GDP data are

in 2005 dollars. The
growth rate is the
average annual change in
the log of GDP per
worker. A negative
number in the Years to
double column indicates
years to halve.

Source: Jones and Vollrath (2013), Introduction to Economic Growth,

3rd Ed., Norton, Table 1.1, p. 4 (using Penn World Tables Mark 7.0).
The stylized facts of economic growth
Stylized Fact 1: Income per capita varies greatly across
economies.

Stylized Fact 2: There is a lot of variation in growth rates across

countries.

Stylized Fact 3: In the world, growth rates were almost zero over
most of history, but have sharply increased in the twentieth
century. For individual countries, growth rates can also change
over time.

Stylized Fact 4: A country can move from being relatively poor

to being relatively rich, and viceversa.
 World per capita GDP and growth rates, 1500-2000

Source: Jones and Vollrath (2013), Introduction to Economic Growth, 3rd Ed., Norton, Figure
1.3, p. 12. Computed from Maddison (2010). The numbers above each line segment are
average annual growth rates.
Heterogeneity of growth experiences

Source: Jones (2015), Figure 22 at p.39.

Beyond GDP: Welfare across countries

Source: Jones (2015), Table 5 at p.49.

Other facts: Growth at the frontier
Stylized Fact 5: In most countries in Western Europe and in North
America over the last century:
1) The average growth rate of GDP per capita has been positive
and relatively constant over time that is, these countries
exhibit steady, sustained per capita income growth;

2) The shares of income devoted to labour ( ) and to capital


( ) show no trend (at least up to the year 2000); *

3) The real rate of return to capital, , shows no trend upward
or downward.

* = real wage rate; =real interest rate; =total amount of labour; = total
output (=GDP), =total physical capital
Growth of GDP per person in the United States

Source: Jones (2015), Figure 1 at p.2.

Capital and labor shares of factor payments, USA

Source: Jones (2015), Figure 6 at p. 15.

 From points 2) above (on capital share of income) and 3), we
have that / is constant;
Then, / (capital per worker, also called capital intensity) grows
at the same rate as / (GDP per worker);
From point 2) (on labour share of income), we have that the real
wage rate also grows at the same rate as /.

All of these facts (stylized fact 5 + the points above on this page)
seem to characterize most Western countries in the last
century...
...and they are summarized in a theoretical concept called
balanced growth.
Balanced Growth

A growth process follows balanced growth if:

GDP per worker, capital intensity (=/), consumption per
worker, and the real wage grow at the same constant rate.
The capital-ouput ratio and the rate of return on capital
are constant.
The labour force (population) grows at a constant rate.
GDP, consumption and capital grow at the same constant
rate.

Balanced growth is an important concept for evaluating the

growth models in the following classes.
Other facts: Convergence
A selected
group of
countries
converge to
a same
growth
path, and
thus to the
same GDP
per worker.

Source: Srensen, Peter Birch and Hans Jrgen Whitta-Jacobsen (2010). Introducing
Advanced Macroeconomics: Growth and Business Cycles. Second Edition.
Berkshire: McGraw Hill Education, Figure 2.3, p.39.
Convergence (cont.)
This means
that it must
be that the
initially
poorer
countries
grew more
rapidly than
the initially
richer
countries.

Source: Jones (2015), Figure 25 at p.42. Data of OECD countries.

Lack of convergence for the world
Worldwide,
there is no
tendency
for poor
countries to
grow either
faster or
slower than
rich
countries.

Source: Jones (2015), Figure 26 at p.43.

Other facts: Convergence

Worldwide, there is no tendency for poor countries to catch

up with the income per capita of rich countries. However, a
selected group of countries (OECD) is observed to converge to a
same growth path, and thus to the same GDP per worker,
with the relatively poorer countries in this group growing at a
higher rate than the richer countries.