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These are all the countries that experienced income growth over these 54 years. And a couple of countries such as Niger and the Democratic Republic of Congo have even experienced negative growth over the reference period. But the large majority of countries, all those above the blue line, have experienced growth. Those countries that are far above the blue line had the strongest growth.

Botswana fold increase , South Korea fold , Romania fold , China fold , and Thailand fold are some of the countries with the strongest growth over these 54 years. The discussion above focussed mostly on output per capita, the map below shows the total output by country. There are two ways to increase output over time: Increase inputs or to increase productivity, the ratio of output to input.

How it is possible to raise productivity can be most clearly seen when one considers a single industry only. Think about the production of books: Before the printing press was invented the only way to copy a book was for a scribe to copy it. Gregory Clark 11 estimates that the scribes who were doing this work back then were able to copy 3, words of plain text per day. This implies that the production of one copy of the Bible meant days 4.

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This changed fundamentally when Johannes Gutenberg adopted the technology of the screw-type wine presses of the Rhine Valley where he was from to develop a printing press. The hours of work a printer had to put in was now measured hours rather than months. Estimates are that a worker was able to produce around 2. Over time printing presses were improved and during the Industrial Revolution they were mechanized and productivity of workers increased further.

The Internet stands in this long tradition and as texts can now be seen by millions in an instant the productivity in the business of making texts available is off the charts. The visualization below shows the rising output of the economy by industry. Each time-series is indexed to the year so that the focus here is on the change over time as all changes are relative to that year.

The rising output of key industrial and service sectors is shown here. This means that the output per person in one year in the past was less than the output of the average person in two weeks today. It is remarkable how steady economic growth was over this very long period. From to GDP per person in the U. The chart below compares the economic growth at the technological frontier with the growth of countries that are further away from the technological frontier.

In this chart the steepness of the growth path corresponds to the growth rate as GDP per capita is plotted on a logarithmic axis. Economies that are far away from the technological frontier can grow very rapidly. Catch up growth can be much faster than growth at the technological frontier. Urbanization and economic prosperity are strongly correlated as the following visualization shows. A survey asked the question "How important is religion in your life? There is a clear correlation between poverty and religiosity. In richer countries the share of the population for whom religion is very important is much lower.

The visualisation shows the very substantial decline in the labor force participation of men of 65 years and older in the USA since the end of the 19th century. To allow saving and facilitate transactions access to financial services is important. We know that in poorer countries this access is often very limited. We don't know much about how this access has changed over time and to understand this change better we have attempted to combine different sources — the result of which is shown in the world map below.

The data is very scarce on this pre, but World Bank estimates provide an additional single point for countries. The challenge is that it is not exactly the same measure as the and data, but instead a composite measure of access to a bank account and financial services. The World Bank define this composite indicator as measuring "the percentage of the adult population with access to an account with a financial intermediary.

The indicator is constructed as follows: for any country with data on access from a household survey, the surveyed percentage is given.

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For other countries, the percentage is constructed as a function of the estimated number and average size of bank accounts as discussed in Honohan These numbers are subject to estimation error. The use of composite measures is, of course, not ideal. However, we think it should still give a fairly reasonable basis of the early s to use as an earlier estimate and the direction of progress trends. It measures the monetary value — the price — of all goods and services produced in a country. To allow for comparisons between countries and over time, the total economic output of a country is put in relation to the number of citizens in that country.

This is GDP per capita. As everyone who had a beer or a haircut ten years ago will remember the price of goods and services usually increases over time, this is called inflation and is most commonly measured with the consumer price index CPI. Comparisons of prosperity over time are therefore only meaningful when these price changes are taken into account so that the growth rate does not capture mere changes in prices.

Measures of incomes are only meaningful when they are put in relation to measures of prices that these income receivers face. When incomes are adjusted for prices economists speak of the real value of a good or service. But since comparisons only make sense when one adjusts for price changes, it is usually the case that adjustments for inflation have been made even when it is not explicitly said.

GDP is published in a country's National Accounts. It theory these three measures should be equal; they constitute an accounting identity. A company's revenue is the income it generates from selling the goods and services it produces to consumers; yet that same revenue is also the expenditure of consumers on those goods and services. Paul Krugman makes the point that "our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income. In reality, average incomes and GDP per capita will not be equal.

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To make meaningful comparisons of prosperity over time it is necessary to adjust for inflation. But how is this actually done? If you then find that the price of bread doubled over a period, but your employer still pays you the same income, then you can only buy half as many breads from your income and your income in terms of bread has halved. A halving of your income in terms of bread is your income adjusted for the inflation of bread prices.

But to measure prices by relying on one product only has the obvious problem that you could end up picking a product that was not representative of the price changes of all the other products and services that consumers want to buy. While the price of bread may have increased, the prices of the majority of other goods could have decreased.

The idea for inflation adjustment for incomes is therefore to instead rely on a commodity bundle of goods and services that are representative of the consumption of the average household. By relying on a representative commodity bundle instead of bread alone allows you to adjust incomes not only for bread, but for the cost-of-living more broadly.

The following chart displays the composition of the commodity bundle of goods and services used in Germany. The basket used is chosen to reflect the expenditure of the typical household, so that changes of this bundle measure the changes to prices the typical consumer faces. What we are interested in is the price change of this bundle of good over time and the history of prices is then expressed in an index called the Consumer Price Index , which is indexed to for a chosen base year.

As consumption differs in different countries, these household consumption baskets vary from country-to-country and over time as new technologies emerge which make new goods and services available and because consumption preferences change. Only incomes in relation to prices gives us an idea about how the prosperity of a population changes.

Incomes on their own or prices on their own cannot give us an idea about changing prosperity. The prices that we see on the price tags in the shop are the nominal prices and since we almost always have some inflation these prices tend to go up.

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Nominal prices and incomes are expressed in terms of money, in this case British Pound, and in income statistics nominal incomes are reported as incomes in 'current prices'. The inflation adjustment of income is done by expressing income relative to the price of a commodity bundle such as the one described before. The nominal income relative to the nominal price level as measured by the CPI is the real income. Real incomes measure the change to income, adjusted for the fact that nominal prices have increased or decreased and in income statistics real incomes are therefore reported as incomes in 'constant prices'.

Economics: The Remarkable Story of How the Economy Works

The chart below shows two series in current prices, nominal weekly wages and nominal prices in the UK, and a third series, which is constructed from the information in the nominal series: 'inflation adjusted wages' or 'real wages'. Let's look at nominal prices first. The index that measures the typical consumption bundle of goods and services in the UK has a value of in and a value of 0. But over the same period the nominal weekly wages paid in the UK economy increased as well. This is a fold increase. To calculate the real increase in wages we need to look at the nominal wage increase in relation to the nominal price increase.

This tells us that average real wages are If their great-great-grandfathers in had to work for a year to buy a representative consumption bundle, Brits today have to work for only a bit more than a month to buy the comparable bundle of goods and services. It is not just prices that change over time. The very products and services that we produce and buy change. Technological progress has meant that the goods and services available today are invariably superior to those available several hundred years ago, with almost no example to the contrary.

To emphasize this point consider the following example: In the richest man in the world was probably Nathan Rothschild. Rothschild could afford whatever he wanted - every good and service available in the world of Yet in that same year, the 56 year old died of an infection that is curable today by antibiotics, which are available around the world for even the poorest people today. The Stiglitz, Sen, Fitoussi report explains "Quality change can be very rapid in areas like information and communication technologies.

There are also products whose quality is complex, multi-dimensional and hard to measure, such as medical services, educational services, research activities and financial services. Difficulties also arise in 1. Evidence and references in support of the claims presented in this Summary are presented in a companion technical report. Under-estimating quality improvements is equivalent to over-estimating the rate of inflation, and therefore to underestimating real income.

For instance, in the mids, a report reviewing the measurement of inflation in the United States Boskin Commission Report estimated that insufficient accounting for quality improvements in goods and services had led to an annual overestimation of inflation by 0. This led to a series of changes to the US consumer price index. Instead of looking at price adjustment for incomes, we can also look at price adjustments for output.

Nominal GDP is a measure of the value of output produced in a country or region over a specified period usually one year. The value of output is composed of two factors: the volume produced and the price,. Therefore increases to GDP are either the result of more output, higher prices or a combination of the two. When looking at the performance of a single economy over time it is important that we control for price effects since they can mask changes to the value of output. In these cases we adjust for the price changes and look at real GDP. The real GDP is constructed by 'deflating' the nominal GDP by a price index that tracks changes to prices in the economy relative to a chosen base year.

This transformation attempts to isolate volume changes by eliminating price effects. The CPI index measures price changes of consumption whereas the GDP deflator measures price changes of domestic production. Consequently there are several important differences of the two price indices: In order to highlight the difficultly of making international comparisons between countries, consider the average income of somebody living in India compared with the US.

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Since the average incomes are stated in different currencies, comparing the numerical value is meaningless and does not help us determine who is richer and by how much. This number is over 33 times smaller than the income of the average American! However, it is obvious that the cost of living in the US is much higher than in India, which implies that the comparison of incomes made at market exchange rates is also not a fair comparison of how rich or poor the people really are in comparison.

This conversion takes into account differences in the price levels of both countries. The precise nature of PPP adjustments is explained in the section below. This does not mean that comparisons of GDP evaluated at market exchange rates are uninformative. In fact, when comparing financial flows, PPP-adjustments are meaningless and GDP evaluated at the market exchange rate is the most appropriate measure. When comparing development and living standards, the converse is true since we need to eliminate price effects.

GDP comparisons made using market exchange rates fail to reflect differences in the purchasing power of different currencies. In general, prices are higher in developed economies, 21 and so exchange rate adjusted GDP measures will underestimate the size of low income economies. In a simplified world, the prices of traded goods are determined by global demand and supply forces, while the prices of non-traded goods are determined by local demand and supply forces.

Since wages and salaries are lower in developing countries, the prices of non-traded goods also tend to be lower. This feature is missed by exchange rate adjusted GDP calculations as no distinction is made between traded and non-traded goods. In a world where all goods are traded, exchange rate adjusted GDP would be a more informative way to make international comparisons.

Nevertheless, another complicating factor is that exchange rates are highly volatile and determined by currency speculation, interest rates and international capital flows. That is, they eliminate disparities in the price levels of different economies.


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A PPP exchange rate can be thought of as the cost ratio of a comparable but not identical basket of goods in two countries. Hence, the methodology is analogous to that used in computing CPI inflation to calculate real GDP, except that here the comparisons are made between countries rather than over time. The US dollar is the most common unit of currency used to make international comparisons and, for clarity, PPP-adjusted quantities are quoted in international or Geary-Khamis dollars.

When making international comparisons we are interested in the ratio of output volume. It is possible to remove the currency differences by using the exchange rate to convert the GDP into a common currency, but this would leave price level differences. The PPP exchange rate adjusts for both the currency and the price level ratio. The study covers countries and is the most extensive study of PPPs ever conducted.

The Little Book of Economics is also an indispensable resource to students or anyone thinking of working in economics or finance. Each chapter explains key concepts and indicators. This little gem can turn all of us into sophisticated and educated citizens. The Little Book of Economics will teach you much more than a little about the forces that shape all of our lives.

More importantly, it gives you just enough connections between events and economic theory to pull you deeper into topics that interest you and makes reading economic news that much easier. Ip skillfully includes essential economic history without making readers feel as though a time warp has thrown them back into an unpleasant undergraduate economics course. The simplicity of the book is brilliant, and its content is even more. I am almost in my third time of reading it. What went wrong? Its bubble economy collapsed, and, beneath the surface, the key determinants of long-term growth turned against it: productivity growth slowed down and its work force began to shrink.

Oh My! Business cycles are an unavoidable and largely unpredictable feature of market economies. In this chapter we learn how psychology, the financial markets and the Federal Reserve all drive these cycles of expansion and recession. Recessions became milder during the Great Moderation of but they were not eradicated.

Financial crises produce severe recessions and weak recoveries and can even result in a depression. The chapter explains how recessions and depressions are identified and the role of the National Bureau of Economic Research in dating recessions. We have a wealth of tools and data with which to monitor the progress of the economy. They are far from perfect: if the economy were an airplane, then it would have imprecise instruments, a filthy windshield, and old, faded maps. It explains the components of gross domestic product and the other key economic indicators such as retail sales and housing and what they tell us about the state of the economy.

It shows us how to locate and use economic forecasts, their shortcomings, and how to use the financial markets as leading economic indicators. In the depths of recession it is almost impossible to conceive of where the jobs will come from. Yet the new jobs always come.


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This chapter explains the determinants of labor force growth, participation in the labor force, employment, unemployment, the natural rate of unemployment, wages, and the role of technology and globalization in wage inequality. High inflation is destabilizing and corrosive; deflation can be destructive. This chapter explains how the inflation and deflation damage an economy, and what causes them. The money supply, for all its theoretical importance, is useless in practical terms for understanding inflation. Different measures of inflation are analyzed, in particular the consumer price index, and its shortcomings.

It explains the political choices involved in inflation and the impact on social stability. This is the first of two chapters dealing with globalization; it focuses on international trade. Their determinants are discussed, along with outsourcing and other current controversies, protectionism, and how theUnited Statesand the World Trade Organization handle trade disputes which are like the penalties handed out in a hockey game.

It continuously channels money from savers in one part of the world to borrowers in another. The most important price in the economy is the exchange rate. This chapter explains the purpose of a currency, what drives movements in exchange rates, why countries give up their own currency and join a monetary union.

It also explains why the euro zone, the largest monetary union in the world, slid into crisis. A president implements economic policy both through his own decisions, aided by a network of advisors and government departments, and through the people he appoints to run regulatory agencies. This chapter identifies the key players and agencies that help the president formulate policy such as the National Economic Council and Treasury Department, and the roles of regulatory agencies such as the Federal Trade Commission and how they influence the economy.

It describes the culture and governance of the institution, political threats to its independence and how these have been handled. We learn how the Fed uses open market operations to raise or lower interest rates, then turns to unconventional strategies such as large-scale purchases of government bonds, if it has already lowered interest rates to zero.

This chapter shows how the Fed, as lender of last resort, lends to banks in need of cash, and how it stretched the boundaries of its powers to prop up the financial system in the crisis of