Global Challenges

Future Business
Jos Tavares

2015

Lecture 4
Income and Growth
INCOME AND GROWTH
Income Lights
Income Lights
Income Lights
Income Lights
Income Lights
 Its Getting Cheaper All the Time
Commodity Time-to-Earn Time-to-Earn Productivity
in 1895 in 2000 Multiple
(Hours) (Hours)
Horatio Alger (6 vols.) 21 0.6 35.0
One-speed bicycle 260 7.2 36.1
Cushioned office chair 24 2.0 12.0
100-piece dinner set 44 3.6 12.2
Hair brush 16 2.0 8.0
Cane rocking chair 8 1.6 5.0
Solid gold locket 28 6.0 4.7
Encyclopedia Britannica 140 33.8 4.1
Steinway piano 2400 1107.6 2.2
Sterling silver teaspoon 26 34.0 0.8

Multiplying Productivity - 1895-2000

Time Needed for the Average Worker to Earn the Purchase Price of Various Commodities Source: Bradford DeLong
Growth: The Long Term

Source: Economic Growth, David Weil

Growth Forever

The Impossible Hamster

http://www.youtube.com/watch?v=bqz3R1NpXzM
 Who Grows and Who Doesnt?

A rough symmetry
But not centered around 0
Half the countries grow faster than the U.S.
Compare developed and developing countries

Source: Economic Growth, David Weil

 Who Grows and Who Doesnt?

Who grows faster?

How does growth change as countries get richer?

Source: Economic Growth, David Weil

 Who Grows and Who Doesnt?

Two instances of Real Convergence

1. Absolute Convergence
- Poorer countries grow faster than richer countries

2. Conditional Convergence
- Poorer countries grow faster than richer countries, after controlling
for key initial conditions
- education, trade, geographical characteristics

3. Compare Nominal Convergence

GDP per worker and Capita per worker

Source: Economic Growth, David Weil

Sources of Differences in Income per Capita

Source: Economic Growth, David Weil

GDP, GDP per capita, and Population
The Top Ten

Source: Economic Growth, David Weil

Projected GDP

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Projected GDP per capita

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Projected GDP

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Projected GDP

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Coming Growth

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Coming Growth

The Long View How will the global economic order change by 2050?, Price Waterhouse Coopers
https://www.pwc.com/gx/en/world-2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
Inequality Within a Country

Source: Economic Growth, David Weil

 Income Distribution
A Telling Tale?

The police investigation gave origin to a sensational discovery. Not the murderers name, which
was soon revealed, but a discovery of a different nature, profoundly human. The vegetable seller
had succumbed, it seems, under the extreme pressure of a terracottta piss-pot thrown at him,
from the destitute room of Radwan Aly, the poorest man in the world. The profound humanity
of the gesture lied in the following: the piss-pot with which Radwan Aly had hit the street seller
was Radwans only asset, the only piece of furniture in his home, and he had not hesitated in
sacrificing it to safeguard the sleep of the whole street. Before such a sense of sacrifice, even the
police were confused.
World Inequality
Millionaires

Source: National Geographic Society

Millionaires
Income Distribution The World

Income Distribution
World and Selected Countries
1970 2000
Income Distribution The World
Video Case Study
The Rise of Asia

Use the following talk to:

Identify the major moments in Asias growth history
Relate income growth and health indicators

The Rise of Asia

Hans Rosling

15:50 min
http://www.ted.com/talks/hans_rosling_asia_s_rise_how_and_when.html
 Global Business Challenges

People and Income

Stocks and Flows

Marginal Product
Factors of Production
Productivity
Human Capital
Convergence: Absolute and Conditional
Equity
 Lecture 4 Stocks and Flows
Concepts
A stock variable is measured at one specific time, and
represents a quantity existing at that point in time,
which may have accumulated in the past. A flow
Stocks and Flows variable is measured over an interval of time. Therefore
Marginal Product
Factors of Production a flow would be measured per unit of time, say a year.
Productivity
Human Capital
Convergence: Absolute and Conditional
Equity

Source: www.economist.com/economics-a-to-z/s

5
 Lecture 4 Marginal Product
Concepts
The marginal product of labor is how much extra
output a firm would get by employing an extra worker,
or by getting an existing worker to put in an extra hour
Stocks and Flows on the job.
Marginal Product
Factors of Production
Productivity
Human Capital
Convergence: Absolute and Conditional
Equity

Source: www.economist.com/economics-a-to-z/m

2
 Lecture 4 Factors of Production
Concepts
The major inputs to economic activity, the combination
of which leads to output, are land, labor, capital and
enterprise.
Stocks and Flows
Marginal Product
Factors of Production
Productivity
Human Capital
Convergence: Absolute and Conditional
Equity

Source: www.economist.com/economics-a-to-z/f

3
 Lecture 4 Productivity
Concepts
Labor productivity is the most widely used measure of
productivity and is usually calculated by dividing total
output by the number of workers or the number of
Stocks and Flows hours worked. Total factor productivity attempts to
Marginal Product
Factors of Production measure the overall productivity of the inputs used by a
Productivity
Human Capital firm or a country
Convergence: Absolute and Conditional
Equity

Source: www.economist.com/economics-a-to-z/f

3
 Lecture 4 Human Capital
Concepts
The stuff that enables people to earn a living. Human
capital can be increased by investing in education,
training and health care. Economists increasingly argue
Stocks and Flows that the accumulation of human as well as physical
Marginal Product
Factors of Production capital (plant and machinery) is a crucial ingredient of
Productivity
Human Capital economic growth, par-ticularly in the new economy.
Convergence: Absolute and Conditional
Equity Even so, this conclusion is largely a matter of theory
and faith, rather than the result of detailed empirical
analysis.

Source: www.economist.com/economics-a-to-z/h

7
 Lecture 4 Convergence: Absolute and Conditional
Concepts An important issue is how likely it is, and how fast it
takes, for developing countries to become developed.
Growth theory as proposed by neoclassical economics
predicts that poor countries will grow faster than richer
ones. The reason is diminishing returns to capital. Since
Stocks and Flows
Marginal Product
poor countries start with less capital, they reap higher
Factors of Production returns than a richer country. This mechanism is called
Productivity absolute convergence.
Human Capital
Convergence: Absolute and Conditional
Equity But this absolute convergence is not supported by most
data. Some argue there is no absolute convergence
because initial conditions in poor countries are very
diverse. In particular, it seems that a country's fertility
rate, its human capital, and government policies may
determine whether there is convergence or not. This
mechanism is called conditional convergence, that is,
convergence holds when certain conditions are met
Source: www.economist.com/economics-a-to-z/s

1
 Lecture 4 Equity
Concepts Fairness. How the economic pie is divided up. Treating
similar people similarly is called horizontal equity.
Treating differently people differently is called vertical
equity.
Stocks and Flows
Marginal Product
Factors of Production
Productivity
Human Capital
Convergence: Absolute and Conditional
Equity

Source: www.economist.com/economics-a-to-z/e