The Importance of Growth Rates

by on January 13, 2016 at 7:25 am in Data Source, Economics, History | Permalink

Here’s the latest video from our MRUniversity course on the Principles of Macroeconomics; it’s an introduction to growth rates and comparing countries across time.

1 rayward January 13, 2016 at 8:27 am

Can the growth rate be increased? And if so, are there any trade-offs? The trade-off is usually defined as output stability vs. inflation stability. Tabarrok’s nice graphs seem to reflect stability at about 2% annual growth. At least that’s the case historically in the U.S. according to Tabarrok’s graphs. But is that the case today, with a global economy and the exponential increases in productive capacity in countries like China and India. My observation is that today the trade-off isn’t output stability vs. inflation stability, but financial stability in a world economy that is increasingly unequal. Equality stability vs. financial stability. I’d like to see that graph.

2 Gochujang January 13, 2016 at 10:28 am

The video takes the simple, instructional, view that GDP per capita is standard of living, and that is what to optimize. That is fine as a first pass, but it would be bad to get stuck there.

GDP is not actually evenly distributed, and even if it were, the money to life satisfaction link is less direct than economists believe.

3 Alex Tabarrok January 13, 2016 at 11:00 am

Exactly right. Bear in mind that this is only one video in a whole course. We cover GDP, standard of living and distribution here

4 Gochujang January 13, 2016 at 11:27 am

That is a good video as well. What interests me is how diffuse the GDP/capita to Life Satisfaction chart really is. Bulgaria is doing something wrong, but on the other hand, Jamaica is doing something right. The former is suffering much worse satisfaction than many poorer countries, while the latter is cranking happiness better than most.

In terms of what to optimize, I say go straight for life satisfaction, and don’t use GDP/capita as a good enough “proxy” to forget the original intent.

5 Floccina January 13, 2016 at 5:08 pm

It is hard to measure happiness.

6 Gochujang January 13, 2016 at 6:22 pm

I agree with Daniel Gilbert that the reasons to accept self-reports are stronger than the reasons to deny self-reports

7 rayward January 13, 2016 at 11:59 am

It’s an excellent video, as are all of them in the series, and I didn’t mean to imply otherwise. I’m a firm believer in the importance of foundations, in this case the concepts underlying economic growth. I was trained to be a tax lawyer (something I haven’t been for many years), and I was fortunate to have several professors who believed students must understand the background and concepts underlying our tax system in order to interpret and apply the tax laws to situations that don’t fit clearly within the statutory framework. And that approach helped immensely when I transitioned to health care transactions at a time when the laws governing those transactions were few and very general (before Stark and the myriad of other laws and regulations since adopted). I was moved to make my comment when Tabarrok layered China and other developing countries on the graph showing the historical economic growth of the U.S. Traditional concepts developed for a closed economy seem out of date and out of place today, as the exponential increase in the world’s productive capacity, in countries like China and India, has the potential to provide economic well-being on a level that was incomprehensible only ten or twenty years ago. Yet, many economists continue to dwell on the old concepts, such as the trade-off between output stability and inflation stability. The world is different now – we aren’t in Kansas any more.

8 msgkings January 13, 2016 at 5:52 pm

It’s one of the most difficult things, trying to figure out when it really is “different this time”. So many things are thought to be paradigm-shifting, and then it’s just part of the same cycles. But some things really do change fundamentally, it’s why our lives do not look like those of our grandparents, or great-great-grandparents. Was the ‘growth boom’ of the last 2 centuries an aberration from the norm, or is it the new norm, or are we heading into something altogether new?

9 Gochujang January 13, 2016 at 10:31 am

(Case in point, David Brooks and his life dissatisfaction.)

10 Ray Lopez January 13, 2016 at 8:41 am

Growth rates are overrated. It’s been said a lot of initial growth in a developing country is nothing more than bringing the informal sector (black market) into the formal sector. Simple example: stay-at-home farmer mom goes to work in a factory (and takes a pay cut doing so) and sends her kids to day care center. The day-care center expenses are counted as ‘growth’, as does the new factory job, but nothing really changed, and in this example GDP actually went down.

11 josh January 13, 2016 at 9:27 am

All good points. How many boomers would seriously rather come of age now than in their own time. At some point, “growth” seems to have some serious diminishing returns.

12 Todd Kreider January 13, 2016 at 10:39 am

If I live to be 65 (a big if), it will be the year 2035. I’d definitely take that year’s medical / pharmaceutical technology over what a 65 year old baby boomer has available today. It is too bad that the baby boomers felt as a generation that a huge military *after* the Cold War was more important than their own health. But at least they ate well, kept trim and exercised regularly, so they should be OK.

13 Alain January 14, 2016 at 10:35 pm

All rational boomers would want to come of age now instead of them. It is shockingly better today than in the 1960s. If you don’t see that I don’t know what to tell you.

14 Dave Smith January 13, 2016 at 9:42 am

Why would the Farmer Mom take a pay cut to go to the factory?

15 Dave January 13, 2016 at 10:19 am

Huh? Isn’t the factory job new? Why would farmer mom take a pay cut to work in factory? If GDP went down what’s this have to do with growth? Or do you mean “actual GDP” (as opposed to “measured GDP”) went down?

16 Ray Lopez January 13, 2016 at 7:34 pm

Farmer Mom miscalculated and took a factory job because she heard “that’s better than life on the farm” (common here in the Philippines). Common with OFW (overseas foreign workers). Measured GDP went up (due to informal, unmeasured market being counted now) but actual GDP went down (value added).

17 Alain January 14, 2016 at 10:40 pm

If it wasn’t value added, you would figure that she would stop relatively quickly.

However, her previous work as a stay at home mom wasn’t counted, this is true.

18 Thomas January 13, 2016 at 9:01 am

Well done and excellent video! Congratulations!

19 Alain January 14, 2016 at 10:42 pm


20 Todd Kreider January 13, 2016 at 10:32 am

Cool video.

A small point, but the IMF and WB have China’s GDP/capita at around $14,000 today, not $8000. That means China is closer to where the U.S. was in 1940, not the Roaring 20s. As mentioned, the comparison only goes so far as a billion Chinese now have smartphones instead of a dial phone/Atari system that was popular in 1982.

21 Gochujang January 13, 2016 at 10:42 am

The progress to GDP linkage is hard to measure in the age of digital services.

I think we would agree that MR University itself has impact beyond its GDP footprint.

22 T. Shaw January 13, 2016 at 11:28 am

The importance of growth rates . . . declining.

23 Gochujang January 13, 2016 at 11:48 am

I guess the whole point of the Erik Brynjolfsson and Andy McAfee Open Letter on the Digital Economy is that they want greater focus on human welfare, rather than top level GDP. FWIW.

24 Alain January 14, 2016 at 10:40 pm


That was horrible.

25 ChrisA January 13, 2016 at 12:06 pm

Good video and high quality – and echoing some of the commentaries above the fact that something like this can be done for free suggests that something is missing from the measurement of real growth rates.

I was in France last week (skiing as a matter of fact) and it occurred to me wondering around one of their supermarkets how much different quality of life is there compared to say a small town in the mid-west USA that perhaps has a much higher level of measured GDP. Is there any objective way to determine this difference I wonder.

26 Mrs. R January 13, 2016 at 12:50 pm

“Is there any objective way to determine this difference I wonder.”

You could examine population migration between the USA and France.

27 Chris Hansen January 13, 2016 at 2:43 pm

A bit of a bait and switch. I thought it was going to talk about what happens when you don’t have decent growth rates and contrast Japan and China. I was curious of the implications of situations where you might have productivity growth but population decline leading to net low or negative GDP. This just seems like high school math.

28 Alain January 14, 2016 at 10:41 pm

This is the basics and Alex covers it well.

29 Skeptik January 13, 2016 at 9:10 pm

I could be given $800k per year for free, and I would still not be happy.

Money isn’t everything, and GDP is almost orthogonal to ethical utility.

30 Alain January 14, 2016 at 10:42 pm


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