Chapter 1

THE FACTS
TO BE
EXPLAINED

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 Some Facts

• 7 billion people inhabit the earth

• 884 million do not have safe water
• 925 million do not have enough food
Life expectancy at birth:
• 56 years for low developed countries
• 69 years for medium developed countries
• 76 years for highly developed countries
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 Living Standards

In 2008, the number of cars per 1000 people:

•687 in Australia
•2 in Bangladesh

In 2003, world electricity use:

•2.3% in Sub-Saharan Africa (11% of world population)
•26% in the United States (4.6% of world population)

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 Why rich and poor?

• 20% of the world receives 60% of total income

• 2.6 billion people survive less than two dollars per

day

• 1.1 billion people survive less than one dollar per

day
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 Facts over Time

Life expectancy in Japan

•35 years in 1880
•83 years Today

Average workweek in USA

•61 hours in 1870
•34 hours Today
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 Main Questions in Growth

• Will the richest countries continue to grow richer?

• Are the poor countries in poverty trap?
• Will the gaps between rich and poor close?
• Will the limitations of resources make it
impossible for poor to catch up?
• Will new technologies allow human race to leave
behind the scarcity?
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 GDP

A measure of the value of all goods and services

produced in a country in a year.

GDP = C + I + G + NX

GDP = w + r + i + π

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 Table 1.1 Top Eleven Countries in Year 2009
According to Three Different Measures

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 Figure 1.1 The Parade of World Income

Source: Heston, Summers, and Aten (2011).

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 Figure 1.2 GDP per Capita in the
United States, 1870–2009

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 Figure 1.3 The Effect of Using a Ratio Scale

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 Figure 1.4 GDP per Capita in the United
States, 1870–2009 (Ratio Scale)

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 Figure 1.5 GDP per Capita in the United
States, the United Kingdom, and Japan,
1870–2009

Sources: Maddison (1995), Heston, Summers, And Aten (2011).

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 Growth Rate

Growth rates of income: how quickly their income

per capita is rising.

g = (GDP(t+1) - GDP(t)) / GDP(t)

Rule of 72:
Doubling time = 72/g
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 Growth Facts

• 1.8% annual growth rate of US income over the

period 1870-2009
• 12.3-fold increase in income per capita
• Growth miracles (USA, Canada, Japan)
• Growth disasters (Nicaragua, Somalia, Zimbabwe)

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 Figure 1.6 The Distribution of Growth Rates,
1975–2009

Source: Heston, Summers, and Aten (2011).

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 Figure 1.7 GDP per Capita by Country Group,
1820–2008

Sources: Maddison (2008), Heston, Summers, and Aten (2011).

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 Income Inequality

Which is more important?

•Within-country inequality
•Between-country inequality

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 Figure 1.8 World Inequality and Its
Components, 1820–1992

Source: Bourguignon and Morrison (2002).

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 Some Definitions

• Capital: machines, vehicles, buildings, and other

equipment.
• Investment: the goods and services devoted to the
production of new capital.
• Productivity: the amount of output produced with
each unit of capital.
• Technology: the available knowledge about how
inputs can be combined to produce output.
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 Definitions Cont’d

• Efficiency: how the available technology and

inputs into production are actually used in
producing output.
• Factors of production: inputs used in production
(worker, capital)
Economic models: simplified representations of
reality that can be used to analyze how economic
variables are determined.
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 Chapter 1

Appendix:
Measuring and
Comparing GDP
Using Purchasing
Power Parity

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 Table 1.2 Production and Prices in Richland
and Poorland

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 Table 1.3 The Effect of Using PPP on
Comparisons of GDP

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