ECON 130 Lecture 19(2).pptx

8/14/2019 ECON 130 Lecture 19(2).pptx

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ECON 130

Lecture 19: Growth



Growth• Are people in New Zealand better off than they were a decade

ago?

• This type of question is often answered using GDP, or thevalue of (annual) output produced in the country.

• You try to make the best use of the information you have to

answer the question, even when you recognise that betterdata would lead to a more considered answer.

• Nominal GDP is no use, as it could just reflect a change inprices, not quantities.

• Real GDP is no use because the population could havechanged.

• The best measure of the standard of living is real GDP percapita (per person), which adjusts for both prices andpopulation.





The drivers of growth

• If we look at just about any OECD country over the last 100

years, we will see growth in (i) the proportion of adults

working, (ii) the physical capital available per worker, (iii) the

time spent in education by the average worker, and (iv)

knowledge, or technology.

• Of these, the biggest influence on growth is usually seen to be

technological change. Ideas, and smarter ways of doing

things, account for most of the growth in the last century.



Some data• First, consider the level of real GDP per capita in various

countries in 2008, using the Maddison World Tables

(complied by Angus Maddison). Consider various countries,

expressed as a percentage of the US real GDP per capita.

Country % of US GDPHong Kong 102%

Canada 81%

Australia 81%

United Kingdom 76%

New Zealand 60%

China 22%

Egypt 12%

Vietnam 10%



Growth data• Consider the average annual growth rate in real GDP per

capita, from 1950 till 2008.

Country Average annual growth (1950-

2008)Hong Kong 4.7%

USA 2.1%

Canada 2.2%

Australia 2.1%

United Kingdom 2.1%

New Zealand 1.4%

China 4.8%

Egypt 2.5%

Vietnam 2.6%



New Zealand

• New Zealand has a relatively small real GDP per capita (comparedto the US), because it has had relatively low growth for the lastcentury.

• A slow growth of knowledge cannot be responsible for NewZealand’s poor performance. If Australians possess knowledge, then

New Zealanders can acquire it fairly easily.

• Human capital cannot be to blame either, as New Zealanders canearn high wages overseas.

• Physical capital seems to be a consequence rather than a cause.

New Zealand has a small capital stock because we are poor (not theother way round).

• This leaves two possibilities; where New Zealand is (well away fromeveryone), and the policies pursued by governments.



Variability

• New Zealand’s GDP may not look like the US’s or Australia’s.However, living standards vary dramatically across states andso New Zealand is very similar to Mississippi (the poorest USstate) and Tasmania (the poorest Australian state). If these

states cannot catch up with the rest of the nation (US orAustralia), what chance does New Zealand have (when it isnot even in the nation).

• Unless New Zealand has very bad economic policies (whichno-one has been able to discover), the most likely explanation

of our low GDP is our location; a low-population island in themiddle of the Pacific. A firm will tend to locate where it is easyto find specialist workers and where there is a high demandfor the firm’s output.



Foreign ownership

• It is common for people to argue that selling assets to

foreigners is bad for the country.

• However, assets are ultimately owned by consumers.

Whether the consumer/owner lives in New Zealand or China

makes little difference, so long as tax laws are not biased

towards foreigners.

• The main consequence of preventing foreigners from buying

an asset is to lower its price, as the number of potential

buyers has been reduced.

• It is not foreign ownership that people object to, but the New

Zealand government selling assets.



Heterogeneity• Nationality is not the issue. If I sell an asset at too cheap a

price, then I suffer, not because of the identity of the buyer

but because of the price (being too low).

• Assets tend to be owned by the wealthy.

• Wealth data tends to be incomplete for most countries;

surveys do not provide reliable numbers. However, data from

the US suggests the top 1% of the population owns 35% of the

total net wealth (assets less liabilities), while the bottom 80%

owns just 15%.

• The wealthy own assets. The wealthy are – by definition –

greedy and amoral. The difference between a wealthy New

Zealander and a wealthy foreigner is very small; they are both

greedy.



Keywords

• Maddison World Tables

• GDP per capita Mississippi

• GDP per capita Tasmania

•

USA wealth distribution statistics

Documents

ECON 130 Lecture 19(2).pptx