Lecture: All about GDP Matt Hill

What Is Economic History? “An attempt to explain the structure and performance of an economy over time.” (North, Structure and Change in Economic History, p.3) – first must be able to measure economic performance over time – Then we must be able to use economic theory to explain growth.

Measurement Issues How do we decide whether the economy is doing well or poorly? How big is the economy? – Before WWII there were no statistics to measure the size of the whole economy

“The Economy”

GDP Invented as a response to Great Depression Early 1930s, US hires Simon Kuznets to construct first measure of the economy National Income is the result and it is a bestseller Many experts believe the US’s invention of GDP helped it win WWII

What is it? Total of all finished goods and services within a country’s borders C+I+G+X Was only intended as a measure of the economy, not to be used to measure standard of living or life satisfaction. Although many now use it as such. It is also a measure the total income of the economy.

Data Problems Before WWII there were no statistics to measure the size of the whole economy Now government collects data Past estimates are based on what ever data was available

Data Problems National Income Accounting does not exist before 1930, so where do these numbers come from? Estimated in various ways. Earlier in time the worse the data is For the earlier period we will look at other measures, like height by age, mortality rates.

Figure 1.1 Univ. of Wisconsin Starting Football Players’ Avg. Weight

Japan Heights Source: Kimura 1984

Real vs Nominal GDP is based on market value so it can go up both because prices are increasing or because more goods and services are produced.

Nominal If we hide this dollar under the bed and leave it there for ten years, its still a dollar. The nominal value is the face value.

Real value is what it buys The average size and price of a 1 oz candy bar was 5 cents in How many candy bars does the dollar buy?

If we leave the dollar under the bed until 2016, how many candy bars will it buy?

In 2016 the average size of candy bar was 1.6 oz and the price was $ 1.10 or $.68 per 1 oz. How many 1 oz candy bars will the dollar buy? The real value is the nominal or face value divided by the price level.

Price level Measured by a price index – Cost of purchasing a fixed basket of goods over time – CPI Real value is nominal value/price level

GDP per Capita GDP per Capita is GDP per person – GDP/population GDP and GDP per capita can be different – China vs. Switzerland Measure of standard of living

GDP Problems (Measurement) What would happen to GDP, if marijuana use was legalized? – GDP would increase. Would all the measured increase be real? – No, some marijuana was grown before but not counted as part of GDP because it was illegal Can you think of a similar historical episode when this would be important?

GDP Problems Basing: Nigeria changed it base and jumped 89% Should the black market be counted?

Another way to think about GDP It’s not goods and services, it’s productivity Hours to make the same good over time As this decreases, individuals can move into other sectors and specialize

Farming example

Productivity Any change in output not caused by more inputs – Labor, land and capital Institutions are one source of productivity differences – Property rights, rules of the game

Other Sources of Productivity increase Technological Change Organizational Change – Specialization and division of labor – Changing incentives Education – human capital – Can consider this part of labor

What do the GDP, GDP per capita statistics for the US tell us? US does not have a very high growth rate for either GDP or GDP per capita With exception of the Great Depression, US growth has been very constant. We will see when we discuss the colonial period that US standard of living was comparable to European standard of living from the beginning. The result is high GDP per capita relative to the rest of the world.

GDP per Capita (2014) 1. Qatar137, Luxembourg97, Singapore83, Brunei79, Kuwait70, Norway67, UAE66, San Marino60, Switzerland58, USA54,370

Further GDP Measurement Issues Does GDP capture what we care about? – Income – Health – Happiness

Stevenson & Wolfers Examine the link between GDP and happiness Easterlin had found link within countries but not between countries. S&W use subjective well-being, which correlated with physical measures: Smiling Laughing Heart rate Sociability Electrical activity in the brain And other subjective measures: Evaluations by friends Self reported health Sleep Personality Also subjective well-being tracks life events well.

Within Country We know income matters within country.

Within Country “When we plot average happiness versus average income for clusters of people in a given country at a given time…rich people are in fact a lot happier than poor people. It’s actually an astonishingly large difference. There’s no one single change you can imagine that would make your life improve on the happiness scale as much as to move from the bottom 5 percent on the income scale to the top 5 percent”

The US Case

Happiness and Growth Robust evidence that there exist strong positive relationship between income and happiness The US is the exception

Sources of Growth Inputs – Labor Human capital – Capital – Land Technological Change Institutional Change

Production Possibility Frontier

What sources of growth are important? – 1776? – Around the Civil War? – WWII? – Now?