Study guide: Facts and Measurement of Economic Growth

📋 Course Outline

1. Global Income and Living Conditions
2. Population, Urbanization, and Environment
3. Income Differences and Global Mobility
4. Nominal and Real GDP
5. GDP per Capita and Well-Being
6. Purchasing Power Parity
7. Poverty and Global Inequality
8. Country Growth Experiences
9. Long-Run Growth and Kaldor Facts
10. Doubling Time and Growth Mathematics

📖 1. Global Income and Living Conditions

★ Must-know

• In 2023, world population was 8.1 billion, while in 2022 world nominal GDP was $101.33 trillion and world GDP measured at purchasing power parity was $139.32 trillion.

• In 2022, world GDP growth was 3.1%, world GDP per capita was $12,743.9 at market prices and $17,523 at purchasing power parity, and the international poverty line was $2.15 per day.

Further detail

• In 2022, world trade volume was $24.9 trillion, 821 million people did not have enough to eat, 844 million lacked safe drinking water, 2.3 billion lacked sanitation, and 780 million people could not read or write.

💡 Memory Hook

Rich output and consumption contrast with poverty, hunger, unsafe water, and low literacy.

📖 2. Population, Urbanization, and Environment

★ Must-know

• World population grew from less than 5 million when agriculture began 12,000 years ago to nearly 250 million 2,000 years ago, 728 million around the Industrial Revolution, 5.3 billion in 1990, 6.8 billion in 2009, and 8.1 billion in 2023.

Further detail

• Urbanization is the process through which the urban population grows faster than the total population, making the world more urban than rural and leading almost two thirds of people to live in cities in 2025.

• The environment supports livelihoods through:

  • agriculture
  • animal husbandry
  • fishing
  • forestry
  • foraging

💡 Memory Hook

Agriculture → industrialization → population surge → urbanization.

📖 3. Income Differences and Global Mobility

★ Must-know

📌 Countries differ greatly in income levels and also in growth rates, so a country that is poor today is not necessarily condemned to remain poor.

Further detail

• Singapore illustrates that a country with low incomes in 1960 can later become a high-income country.

💡 Memory Hook

Different growth rates → changing country rankings → possible convergence or divergence.

📖 4. Nominal and Real GDP

🔑 Key Concepts & Definitions

• Nominal GDP: The market value of all final goods and services produced in an economy during a specified period, measured at current prices.
• Real GDP: Values output at the constant prices of a base year and is corrected for inflation.

★ Must-know

• Nominal GDP can represent: total income, total output, total expenditure, the sum of value added at all production stages

Further detail

• Chain-weighted real GDP reduces the problem that base-year weights become less relevant as relative prices change over time.

💡 Memory Hook

Nominal GDP changes with prices, whereas real GDP holds prices constant.

📖 5. GDP per Capita and Well-Being

🔑 Key Concepts & Definitions

• Economic Growth: The sustained expansion of production possibilities measured by an increase in real GDP over time.

📝 Essential Points

📐 Formula - Real GDP per capita equals real GDP divided by population: $GDP\ per\ capita = \frac{real\ GDP}{population}$.

📌 Real GDP per capita grows only when real GDP grows faster than the population.

• Important dimensions omitted from GDP per capita include:
  • income distribution
  • household production
  • leisure
  • environmental damage
  • volunteer work
  • underground activity
  • health and life expectancy
  • political freedom and social justice

💡 Memory Hook

Real GDP per capita measures material output, whereas well-being also includes health, leisure, environment, and freedom.

📖 6. Purchasing Power Parity

🔑 Key Concepts & Definitions

• Purchasing-Power Parity: The theory that a unit of currency should buy the same quantity of goods in every country.

★ Must-know

📌 The law of one price states that a tradable good must sell for the same price in all locations when trade is free and there are no transportation costs, tariffs, or transaction costs.

• 🔄 International arbitrage proceeds by:
  1. buying the good in the cheaper country
  2. reselling it in the more expensive country
  3. bidding up the cheaper-country price
  4. bidding down the expensive-country price

Further detail

• PPP conversion values goods and services in all countries using a common set of international prices rather than official exchange rates.

💡 Memory Hook

Trade and arbitrage → similar tradable-good prices → purchasing-power comparisons.

📖 7. Poverty and Global Inequality

★ Must-know

• The number of people living below the $1-per-day poverty line fell from 700 million in 1970 to 398 million in 2000, while the share of the world population below that line fell from 20% to 7%.

• Economic growth reduced poverty from 1970 to 2000 by shifting the world income distribution to the right, leaving fewer people below the $1-per-day poverty line.

• Global inequality increased from the Industrial Revolution through the 1980s, declined especially after 2008, and nevertheless remained wider than in the 1820s. - World Bank, 2016

Further detail

• Much of the recent reduction in global inequality came from income convergence among countries, especially the rapid growth of populous developing countries such as China and India. - World Bank, 2016

💡 Memory Hook

Growth shifts income rightward → poverty falls, while inequality may rise or fall.

📖 8. Country Growth Experiences

★ Must-know

• In 2000, average real GDP per person was $34,800 in the United States, $9,100 in Mexico, and $740 in Nigeria, while Luxembourg was the richest country at $45,900 and had 193 times Congo's real GDP per person.

• The average growth rate of real GDP per person for 112 countries from 1960 to 2000 was 1.8% per year; many of the fastest-growing countries were in East Asia, while 18 of the 20 worst performers were in Sub-Saharan Africa.

Further detail

• Real GDP per person in Canada tripled between 1961 and 2011, and Canadian growth in real GDP per person averaged 2% per year from 1926 to 2010.

💡 Memory Hook

Fast-growing East Asian economies contrast with weak-performing Sub-Saharan economies.

📖 9. Long-Run Growth and Kaldor Facts

📝 Essential Points

📌 Trend real GDP represents the long-run growth component, whereas cyclical real GDP reflects short-term business-cycle fluctuations.

📌 Economic growth is a sustained year-on-year increase in real GDP, not a one-time increase or a recovery from recession.

• Kaldor identified six long-run regularities (Nicholas Kaldor, 1957):
  • output per worker grows at a roughly constant rate
  • capital per worker grows
  • the capital-output ratio is roughly constant
  • the rate of return to capital is constant
  • capital and labor shares of net income are nearly constant
  • real wages grow over time

💡 Memory Hook

Sustained trend growth → rising output per worker, capital per worker, and real wages.

📖 10. Doubling Time and Growth Mathematics

★ Must-know

📐 Formula - The Rule of 70 approximates the years required for a variable to double as $doubling\ time \approx \frac{70}{annual\ growth\ rate}$.

📐 Formula - In discrete time, the growth rate of a variable y is $\frac{y_t-y_{t-1}}{y_{t-1}}$, and the percentage growth rate is this expression multiplied by 100.

📐 Formula - Growth rates satisfy $g_{x/y}=g_x-g_y$ for a ratio and $g_{xy}=g_x+g_y$ for a product.

Further detail

• At annual growth rates of 7%, 2%, and 1%, a variable doubles in approximately 10, 35, and 70 years, respectively.

📐 Formula - For a small number y, the natural-log approximation is $\ln(1+y) \approx y$.

💡 Memory Hook

Growth rate → Rule of 70 → doubling time → long-run living standards.

📊 Synthesis Tables

Nominal and Real GDP