Professional Documents
Culture Documents
Human Development
Human Development Index (UNDP)
x j min( x j )
0 Ij 1
max( x j ) min( x j )
Why the Ln of Income?
• P/cap Incomes ranged from $260 (Liberia) to
$93,383 (Qatar)
– That’s really big
• Would an increase in income in rich countries
affect human development as much as the
same increase in poor countries? (No)
• The natural log compresses the income range
– Ln(260) = 5.56 (Liberia) and Ln(93,383) = 11.44
(Qatar).
An Index of Indexes
• Education Index:
I ( Ei ) I ( EYSCi ) * I (MYSAi )
• HDI:
HDI i 3 I (GNIi ) * I ( LEi ) * I ( Ei )
Turning
South Africa 109 66 43
Angola 79 40 39
Gabon 121 83 38
187 153 34
Income into
Qatar
Bhutan 82 49 33
United Arab Emirates 185 158 27
Trinidad and Tobago 151 125 26
Human Average, Worst
Best Performers:
137 94 44
Development Georgia
Grenada
76
93
111
121
-35
-28
Palau 110 138 -28
New Zealand 153 180 -27
Madagascar 11 37 -26
Average, Best 88 120 -32
Source: Analysis of data from the UNDP Human Development Report
Delving into the HDI’s Components
• Education
• Health
Big Challenges: Positive
Externalities and Public Goods
Educating a Country
• Externalities of schooling
– Left to own devices, people underinvest in schooling under
the best of circumstances
– The reason for public education
• IRS: Public health projects have high fixed costs then low or
negligible marginal costs
– Potable water systems, sanitation, vaccinations, disease
prevention
– Marginal-cost pricing doesn’t work (like bridges, national
security)
Costs
• Cash costs (fixed costs and maintenance costs)
• Opportunity costs
– What’s the next best thing you could be doing with the money?
• Build clinics or school rooms?
• Run a public information campaign to reduce HIV?
• Give cash transfers to poor households?
• Build a new airport that can bring tourists in?
• Put in new roads or cell towers?
Growth
• Mercantilists
Growth in History
• Up to ~500 years ago, most lived in conditions
we would call abject poverty
• Today: Income levels much higher and more
diverse
1 2
d gt
2
g = 9.8 m/s2
(gravitational
constant)
In popular lore, Galileo Galilei (1564–1642) dramatically refuted Aristotle’s laws of motion
by dropping unequal weights from the Leaning Tower of Pisa. In the scientist’s extensive
writings, however, he never claimed to have conducted an experiment from that tower.
(http://www.endex.com/gf/buildings/ltpisa/ltpnews/1999/ltpsn121899.htm)
…assumes that you are in a vacuum!
Here's the famous footage of the Apollo 15 astronaut that dropped a hammer
& feather on the moon to prove Galileo's theory that in the absence of
atmosphere
http://www.youtube.com/watch?v=5C5_dOEyAfk
So Is It a Bad Model?
• Not for a Hummer H2
dropped from the top of
the Leaning Tower of Pisa
(or a feather dropped on
the moon)
Y F ( L, K )
If CRS :
Y L K
F ,
L L L
y f (k )
y Output/Worker
k Capital/Worker
yk 0, ykk 0
What Explains Capital/worker in an
Economy?
• The amount of investment per worker
– Creates capital
Savings / wkr : sy
(s = the savings rate)
No capital,
no savings,
no income!
Point A: Steady
state, long run, or
potential output per
worker
Steady
State: Where
k=0
Solow Diagram from PRL
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50
0
0 100 200 300 400 500 600 700 800 900 1000
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50
𝑠𝑦 = 0.1𝑦 = 𝑘 0.5
0
0 100 200 300 400 500 600 700 800 900 1000
k
• Blue curve is: 𝑠𝑦 = 0.1 ∗ 𝑦 = 0.1 ∗ 10𝑘 0.5 = 𝑘 0.5
• 𝑠 = 0.1, so blue curve is just 10% the height of the green curve.
• What does height of the blue curve tell us?
– How much capital per worker would increase thanks to savings (which is invested to
buy new machines) if we had no population growth or depreciation.
350
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50 𝑛 + 𝑑 𝑘 = 0.04𝑘
𝑠𝑦 = 0.1𝑦 = 𝑘 0.5
0
0 100 200 300 400 500 600 700 800 900 1000
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50 𝑛 + 𝑑 𝑘 = 0.04𝑘
𝑠𝑦 = 0.1𝑦 = 𝑘 0.5
0
0 100 200 300 400 500 600 700 800 900 1000
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50 𝑛 + 𝑑 𝑘 = 0.04𝑘
𝑠𝑦 = 0.1𝑦 = 𝑘 0.5
0
0 100 200 300 400 500 600 700 800 900 1000
𝑦 = 𝑓 𝑘 = 10𝑘 0.5
300
250
200
150
100
50 𝑛 + 𝑑 𝑘 = 0.04𝑘
𝑠𝑦 = 0.1𝑦 = 𝑘 0.5
0
0 100 200 300 400 500 600 700 800 900 1000
Chinese people older than 50 save more than 60 percent of their income.
They remember the “bitter years:”
- the Great Famine (1958 to 1961)
- violence of the Cultural Revolution (1966 to 1976)
One young Chinese man said: “Maybe I’m too busy to have a lot of time
spending money.”
Source Data: OECD, World Bank, Standard Chartered, Turkish State Planning Office, British Office for National Statistics
http://www.businessweek.com/printer/articles/46918-how-household-savings-stack-up-in-asia-the-west-and-latin-america
Keith B. Richburg, “Getting Chinese to stop saving and start spending is a hard sell.” The Washington Post, 7/5/2012,
http://www.washingtonpost.com/world/asia_pacific/getting-chinese-to-stop-saving-and-start-spending-is-a-hard-sell/2012/07/04/gJQAc7P6OW_story.html
Explaining Household Savings
http://www.businessweek.com/printer/articles/46918-how-household-savings-stack-up-in-asia-the-west-and-latin-america
• China: 38%
– No national safety net
• India: 34.7%
– India's savings rate has been building along with the acceleration of its GDP growth
• Turkey: 19.5%
– Turkish savings, high by U.S. standards, are not enough for a developing country
• Switzerland: 14.3%
– The Swiss vie with Swedes and Austrians to be the top savers in the West
• Ireland: 12.3%
– The Irish savings rate quadrupled over two years in response to the financial crisis
• Britain: 7%
– British savings have declined sharply since the early 1990s
• Brazil: 6.8%
– Latin American economies generally have low savings rates
• U.S.: 3.9%
– U.S. savings are up from a 1.7% low but far below a postwar average of 7% or so
• Japan: 2.8%
– The savings decline in Japan from 15% in 1992 is the most dramatic in the industrialized world
• Australia: 2.5%
– The Australians, like the Americans, have had a huge housing boom compensating for the loss in savings
Higher Population Growth or
Depreciation Do the Opposite
Higher Population Growth or
Depreciation Do the Opposite
Some Testable Implications of the
Solow Model
Big success stories have growing capital per
worker
– China, Asian Tigers confirm this
– Higher k means higher productivity, wages
You Always Come Back to the
Steady State
Are poor
countries
growing faster
than rich ones?
(Hard to see a
pattern here)
There Isn’t Even Convergence Within
Countries!
• See Hans Rosling’s video
• Shanghai is like Italy
• Rural Guanzhou is like Ghana
• Oaxaca vs. Mexico City
• US South vs. the rest
• The “Farmworker Towns” of California’s San
Joaquin Valley
– …with per-capita income less than Mexico’s!
Things Explaining Growth
• Capital investment
• Political rights
• Openness to trade
• Black markets
• Colonial legacy
• War
• Religion
• …to name a few
The Biggest Question of All
A
At+1< At
Growth Part 2
Point A: Steady
state, long run, or
potential output per
worker
Steady
State: Where
k=0
A Higher Savings Rate (s’>s) Raises K
and Income/Worker
A Higher Savings Rate (s’>s) Raises K
and Income/Worker
Higher Population Growth or
Depreciation Do the Opposite
Higher Population Growth or
Depreciation Do the Opposite
Some Testable Implications of the
Solow Model
Big success stories have growing capital per
worker
– China, Asian Tigers confirm this
– Higher k means higher productivity, wages
The Convergence Hypothesis
• Given s and n, countries’ incomes should
converge. Lower income, higher growth?
Are poor
countries
growing faster
than rich ones?
(Hard to see a
pattern here)
There Isn’t Even Convergence Within
Countries!
• See Hans Rosling’s video
• Shanghai is like Italy
• Rural Guanzhou is like Ghana
• Oaxaca vs. Mexico City
• US South vs. the rest
• The “Farmworker Towns” of California’s San
Joaquin Valley
– …with per-capita income less than Mexico’s!
The Biggest Question of All
A
At+1< At
https://www.youtube.com/watch?v=p5Ac7ap_MAY
Fractional Reserve Banking
• The US dollar, the Chinese Yuan, the Japanese
Yen, the Euro etc. have no single measure, no
backing at all, created at will by banks.
Example
BANKING
SYSTEM
$100,000 $81,000
$90,000
Javier Charlotte
Justin
Lots of new money!
• An initial deposit of $100,000 with a 10% reserve
requirement, creates: