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 the value 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 better data would lead to a more considered answer. Nominal GDP is no use, as it could just reflect a change in prices, not quantities. Real GDP is no use because the population could have changed. The best measure of the standard of living is real GDP per capita (per person), which adjusts for both prices and population.

Real GDP per capita

What could cause real GDP per capita to grow? More workers means more output, though it may not mean more output per worker. If the number of workers in a given population increases (the participation rate rises), then we may see more real GDP per capita. One modification might be to look at the working-age population (say, those aged 16-65), rather than the total population (so you consider total output divided by the working-age population). More capital per worker will increase real GDP per capita. More machines means more output. More education per worker (human capital) means more output per worker. Technological change means more output per worker.

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 Hong Kong Canada Australia United Kingdom New Zealand China Egypt Vietnam % of US GDP 102% 81% 81% 76% 60% 22% 12% 10%

Growth data
Consider the average annual growth rate in real GDP per capita, from 1950 till 2008.

Country
Hong Kong USA Canada Australia United Kingdom New Zealand

Average annual growth (19502008)

4.7% 2.1% 2.2% 2.1% 2.1% 1.4%

China
Egypt Vietnam

4.8%
2.5% 2.6%

New Zealand
New Zealand has a relatively small real GDP per capita (compared to the US), because it has had relatively low growth for the last century. A slow growth of knowledge cannot be responsible for New Zealands poor performance. If Australians possess knowledge, then New Zealanders can acquire it fairly easily. Human capital cannot be to blame either, as New Zealanders can earn 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 the other way round). This leaves two possibilities; where New Zealand is (well away from everyone), and the policies pursued by governments.

Variability
New Zealands GDP may not look like the USs or Australias. However, living standards vary dramatically across states and so New Zealand is very similar to Mississippi (the poorest US state) and Tasmania (the poorest Australian state). If these states cannot catch up with the rest of the nation (US or Australia), what chance does New Zealand have (when it is not even in the nation). Unless New Zealand has very bad economic policies (which no-one has been able to discover), the most likely explanation of our low GDP is our location; a low-population island in the middle of the Pacific. A firm will tend to locate where it is easy to find specialist workers and where there is a high demand for the firms 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