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Topic 7

The document discusses the disparities in income distribution globally, highlighting that the richest 20% receive over 80% of the world's income while the poorest 60% receive less than 6%. It emphasizes the difference between economic growth and development, noting that long-term prosperity is primarily driven by productivity rather than resources or population. Key determinants of growth include supply factors, technology, and institutional factors, with a focus on how these elements influence living standards and economic outcomes.

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3 views17 pages

Topic 7

The document discusses the disparities in income distribution globally, highlighting that the richest 20% receive over 80% of the world's income while the poorest 60% receive less than 6%. It emphasizes the difference between economic growth and development, noting that long-term prosperity is primarily driven by productivity rather than resources or population. Key determinants of growth include supply factors, technology, and institutional factors, with a focus on how these elements influence living standards and economic outcomes.

Uploaded by

anwit4567mon
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Macroeconomics

Long-Run Economic Growth and Living


Standards
The Wealth Gap
The 80/20 rule does apply …
The richest 20% of the world’s population
receives more than 80% of the world’s
income.

At the other end of the spectrum …


The poorest 60% receives less than 6% of
the world’s income.
To Start with

“Why are some countries rich and others poor


— even after 75 years of independence?”

comparison:
India vs South Korea (1960 vs today)
Nigeria vs Singapore

Bihar vs Gujarat (optional domestic


comparison)
Stylized Facts of Economic Growth

Major empirical facts


o Large cross-country income differences
o Persistent growth differences
o Catch-up sometimes occurs
o Growth accelerations & slowdowns

Why did China grow rapidly after 1978 but


not earlier?
Growth versus Development

Economic growth may be one aspect of


economic development but is not the
same.
Economic growth:
• A measure of the value of output of
goods and services within a time period
Economic Development:
• A measure of the welfare of humans in
a society
What Do We Mean by Living Standards?

Core Concepts
• GDP per capita
• Real income
• Productivity
• Consumption possibilities
Key Insight
Long-run prosperity depends
primarily on productivity, not
population or resources
Determinants of Growth
Factors directly affecting the rate and
quality of economic growth.

Supply Factors
• Increases in the quantity and quality of
natural resources.
• Increases in the quantity and quality of
human resources.
• Increases in the supply (or stock) of capital
goods.
• Improvements in technology.
8
Productivity: The Fundamental Driver
Production Function Framework
𝑌 = 𝐴 ⋅ f(K, H, N)
where:
• K = Physical capital
• H = Human capital
• N = Natural resources
• A = Technology
Conceptual Message
Growth = better use of inputs, not just
more inputs.
India v/s China
GDP per worker =
T × (Physical capital per worker)0.4 ×
(Human capital per worker)0.6
The Catch-Up Effect

Theory
Poor countries can grow faster because:
Lower capital base
Higher marginal productivity
Examples:
o South Korea
o Vietnam
o China
Rule of 70 and Catch-Up Time

Rule of 70, a mathematical formula that


tells us how long it takes real GDP per
capita (or any other variable) that grows
gradually over time, to double.

Number of years for variable to double =


70
Annual growth rate of variable
Capital Deepening vs Technological Progress

Source Short Run Long Run


Diminishing
More capital Yes
returns
Education Strong Sustained
Dominant
Technology Limited initially
driver

Key Insight:
Capital accumulation alone cannot
sustain growth forever.
Institutions and Growth

Institutional Factors
Property rights
Rule of law
Political stability
Market incentives
Growth Accounting

Decomposition idea:
Economic Growth ≈
o Capital accumulation
o Labor growth
o Technology growth (TFP)
Business Implications

Why Managers Care About Growth


o Market size expansion
o Demand forecasting
o Wage dynamics
o Investment horizons
o Industry lifecycle differences

Example
Why FMCG firms aggressively invest in
India vs Japan?
Takeaways

Three Big Ideas


➢Productivity determines living
standards.
➢Capital helps but technology
sustains growth.
➢Institutions shape long-run
prosperity.

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