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What is economic growth? And why is it so important?

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on W

  • Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820, OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en.
    At the time when material prosperity was so poor living conditions more generally were extremely poor in general; close to half of all children died.

  • Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

    See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

    There are about 760,000 words in the bible (it differs between various translations and languages, here is an overview for some translations). 

    This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

    Copying the text was not the only step in the production process for which productivity was low. Ink had to be made, parchment had to be produced and cut and many other steps involved laborious work.

    Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

    Clark himself states in the same publication that “Prior to that innovation books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

  • The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (Jun., 2009), pp. 409-445. Online here.
    Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.
    On the history and economics of book production see also the historical work of Jeremiah Dittmar.

  • One source I was relying on in making this list are the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office. And I have also relied on the national accounts themselves.

    This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [Here I shared the list on Twitter]

  • This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

  • Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

  • Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

  • Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.” 

    “Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia.

    Alternatively to my definition I think it can be useful to think of economic growth as not directly concerned with the output as such, but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation’s capacity to produce goods and services.”

    Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured  strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

    An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods and in the literature on growth the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

  • OECD – Measuring the Non-Observed Economy: A Handbook.

    The relevant numbers are not small. For the US alone “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included into the US National Accounts. This is according to the report Rachel Soloveichik (2019) –  Including Illegal Activity in the U.S. National Economic Accounts. Published by the BEA.

    Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

    Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017. In the Survey of Current Business.

  • Helpful references that discuss how the production boundary is drawn (and how it changed over time) are:
    Lequiller and Blades – Understanding National Accounts (available in various editions)
    Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp
    The definition of the production boundary by Statistics Finland

    Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

    Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

  • A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

  • Their production therefore has an opportunity cost, which means that if someone obtains an economic good someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

  • And it is also the case that the international statistics on these measures have often very low cutoffs for what it means ‘to have access’, this is for example the case for what it means to have access to energy.

  • 10 years ago Google counted there were 129,864,880 different books, and since then the number has increased further, by many thousands of new books every day.

  • This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought. I was unfortunately not able to find the raw data anywhere and could not redraw this chart, if someone is available where this (or comparable) data can be found please let me know.

  • In the language of economists the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

  • I learned this way of thinking about it from Twitter-user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

  • The researchers at the World Bank publish regular estimates of the expected change in global poverty. The latest such preliminary estimates can be found here.

  • We’ve discussed one such consideration that is crucial for comparability when we considered how to take into account the value of owner-occupied housing.

  • Whether economic growth translates into the reduction of poverty depends not only on the growth itself, but also on how the distribution of income changes. The poverty metrics shown in this chart here and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

  • Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820, OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en.

    Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The long view on economic growth: New estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820, OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en

    The latest datapoint for the poverty data refers to 2018, while the latest datapoint for GDP per capita refers to 2016. In the chart I have chosen the middle year (2017) as the reference year.

    The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

    The report for the ‘World Bank Commission on Global Poverty’ can be found here.

    Tony Atkinson – and after his death his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty around the World. You find more information on Atkinson’s website.

    The CBN-approach Moatsos’ work is based on was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 

    Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalise this approach, alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data.

    The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years our global measure of extreme poverty was halved again by 2014.”

  • These are the same global poverty estimates – based on household surveys – we discussed above.

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