The document discusses global economic growth and prosperity. It provides information on trends in global poverty rates, GDP measurements, and factors that influence economic growth. Key points include: - Significant portions of the global population still live in extreme poverty, though poverty rates are falling in some regions more than others. - GDP is a common measure of economic prosperity but has limitations in what it captures. GDP per capita varies widely between developed, emerging, and developing economies. - Factors like innovation, human capital, physical capital, reduction of corruption, and income equality can promote economic growth, while issues like overuse of resources may impact the environment. - As educated global citizens, readers can help emerging global prosperity through their understanding of

1. Global Economic Growth Your Role in This Emerging Phenomenon Dean Thomas W. Gilligan

2. State of Global Poverty World Bank Analysis on Poverty http://devdata.worldbank.org/atlas-mdg/ Significant fraction of humans live in extreme poverty This poverty has dire consequences Rate at which this poverty is falling varies widely across regions Some areas are improving swiftly (e.g., China) Some areas are “hard cases” (e.g., Africa) Surprisingly, its mostly very good news 80/20 versus 20/80 (The Bottom Billion, P. Collier)

3. Purpose of Tonight’s Lecture Trends in Global Economic Prosperity Measuring Economic Prosperity Economic Prosperity and Human Well-Being Some Facts about Economic Prosperity in the Developed and Emerging World Key Determinants of Economic Growth Challenges to Economic Growth Economic Growth and Income Inequality Economic Growth and the Environment Your Part in Emerging Global Prosperity Great chance to make a BIG difference

4. Measurement of Economic Prosperity Gross Domestic Product (GDP) Value of all goods and services produced and sold through market exchange? At a particular point in time? Admits dynamic comparisons Growth rate computations Within a particular location or industry? Admits geographic and sectoral comparisons Relative market performance Fairly controversial (conceptually) What does it mean? Are people better off with more active markets? (more later) What does it not measure?

5. Gross Domestic Product (GDP) Expenditure Approach to GDP Accounting: United States, 2008 National Spending Identity: GDP = C + I + G + (EX – IM) Source: U.S. Bureau of Economic Analysis

6. Historical Trends in U.S. GDP How has the U.S. economy grown and its components changed over time? The answer requires some caveats: Must adjust for changes in inflation Let’s use prices in some base year to compute “real GDP” across many different years Accounts for GDP changes due to price differences Must adjust for changes in population Let’s divide GDP by population to compute a “GDP per capita” Accounts for GDP changes due to entirely to population growth

7. U.S. Economy Over Time The CAGR of Real GDP Per Capita over the 1967-2007 period was 2% Source: Economic Report of the President

8. Geographic Trends in GDP How different are economies over the globe? The answer requires a currency standard or conversion to compare GDPs One could use existing exchange rates (ERs) Biased by relative prices of int’l traded stuff One could use exchange rates that represent relatively equal purchasing power across nations Purchasing Power Parity (PPP): Currency ratio (i.e., exchange rate) that implies rough equality of buying power across two countries. PPPs are typically close but not identical to ERs

9. GDP Per Capita in Developed World Source: U.S. Department of Labor, Bureau of Labor Statistics

10. GDP Per Capita in BRIC Countries Source: Organization for Economic Cooperation and Development

11. Money and Human Well-Being Does Money Guarantee Happiness? We know miserable people of substantial means Does Money Preclude Happiness? If you believe this I volunteer to help Might Money Contribute to Well-Being? How can it? Where should we look? Health outcomes Longevity – Does wealth contribute to length of life? Child Welfare – Does wealth reduce infant mortality? Self-Assessed Satisfaction Are people with more income happier?

12. Per Capita GDP and Life Expectancy Source: Maddison, 2007

13. GDP Per Capita and Childhood Health

14. GDP Per Capita and Satisfaction

15. Facts About Economic Prosperity GDP Per Capita Varies Enormously Among Nations GDP Per Capita Varies Enormously within Most Nations Current high levels of GDP Per Capita are a relatively recent phenomenon GDP Per Capita Growth Varies Widely in the Recent Capitalist Epoch There have been growth successes There have been growth failures

16. Prosperity Varies Across Nations

17. Prosperity Varies Within Nations - USA Sources: U.S. Census Bureau for Gross Income and the Heritage Foundation for Net Income. The 90th percentile in household income is over 11 times that of the 10th percentile. The 10th percentile household income is $12,162 in 2007 dollars. Net household income adjusts gross income for taxes, capital gains and losses, non-cash governmental transfers, the EITC, employee health benefits and differences in the size of persons per quintile.

18. High GDP Per Capita is a Modern Event

19. GDP Per Capita Growth Various Greatly

20. What Causes GDP Per Capita Growth? Source: Cowen & Tabarrok

21. Innovation and GDP Growth Technical Knowledge Matters Innovations raise labor and capital productivity Great inventions over time wheel, writing, padded horse collar, mechanical clock, movable type, steam engine, textile manufacturing, network electricity, mass production, transistor, ARPANET, polymerase chain reaction Scientific Revolution, 1550-1750 Major implications for navigation, understanding of the earth’s environment (e.g., weather, geology, etc.), medicine, and other important disciplines Industrial Revolution (textiles, energy, metallurgy) Equip per head grew by multiple of 250, 1820-2000

22. Organization and GDP Growth Composition Matters Organization affects labor and capital productivity Important Organizational Innovations Accounting (for information and control) IT today serves much the same role Banking, Capital Markets and Insurance To help finance and under-write large-scale enterprises (e.g., shipping and trading companies, railroad lines, mass manufacturing, etc.) Nation State Reduced fragmentation of political power which facilitated trade and enforce property rights encouraged innovation and protect patents Mercantilist commercial policies were restrictive, though

23. Human Capital and GDP Per Capita

24. Physical Capital and GDP Per Capita

25. History and GDP Per Capita Great News! Catch-Up Growth Germany and Japan after WWII China and India today

26. GDP Per Capita and Corruption Great News! It’s Hard, But We Know How to Fix Corruption

27. Equality and GDP Per Capita Growth Does Growth Promote Income Equality Why might it not? Relative returns to skilled and unskilled labor Technological substitution of unskilled labor Why might it? Spread of education reduces wage differences Wealth begets charity and progressive taxation Yes, with a couple exceptions Oil-producing countries of the Middle East And, in recent years, the United States Up until the last quarter century, income inequality in the U.S. had been falling with its peer countries

28. A Measure of Income Inequality A

29. Income Inequality Across Nations Developed Economies Emerging Economies Source: Central Intelligence Agency, 2006

30. Environment and GDP Per Capita Does Growth Harm the Environment? Why might it? Developed economies are energy intensive; more pollution and greenhouse gas emissions Developed economies use modern technology, including chemical intensive farming Why might it not? Beyond some level, developed economies use resources more efficiently and demand cleaner air and water for better health outcomes Emerging economies find the opportunity costs of pollution mitigation too “expensive;” these economies are focused on basic human needs

31. Environment and GDP Per Capital Evidence is preliminary and inconclusive Cross-Country Comparisons Atmospheric concentrations of sulfur dioxide, nitrous oxide, carbon monoxide, smoke and lead from gasoline rise through income levels of around $8,000 and decrease thereafter. The same is true for fecal and heavy metals (e.g., lead, arsenic, cadmium, mercury, and nickel) contamination of rivers. Oxygen in rivers declines with early development but then increases. B.M. Friedman, Moral Consequences of Economic Growth

32. Your Role in This Drama You’re among the less than 2% of the world’s population with a college degree Education and Capital contribute to growth You understand science and technology Innovation and creativity contribute to growth You’re organizationally sophisticated New methods (e.g., microfinance) contribute to growth You’re intolerant of corruption Transparency and accountability You’re informed, aware and committed