Growth Rates are Crucial

In the first video in this section on The Wealth of Nations and Economic Growth, you learned a basic fact of economic wealth—that countries can vary widely in standard of living. Specifically, you learned how variations in real GDP per capita can set countries leagues apart from one another.

Today, we’ll continue on that road of differences, and ask yet another question.

How can we explain wealth disparities between countries?

The answer? Growth rates.

And in this video, you’ll learn all about the ins-and-outs of measuring growth rates.

For one, you’ll learn how to visualize growth properly—examining growth in real GDP per capita on a ratio scale.

Then, here comes the fun part: you’ll also take a dive into the growth of the US economy over time. It’s a little bit like time travel. You’ll transport yourself to different periods in the country’s economic history: 1845, 1880, the Roaring Twenties, and much more.

As you transport yourself to those times, you’ll also see how the economies of other countries stack up in comparison. You’ll see why the Indian economy now is like a trip back to the US of 1880. You’ll see why China today is like the America of the Jazz Age. (You’ll even see why living in Italy today is related to a time when Atari was popular in the US!)

In keeping with our theme, though, we won’t just offer you a trip through ages past.

Because by the end of this video, you’ll also have the answer to one vital question: if the US had grown at an even higher rate, where would we be by now?

The magnitude of the answer will surprise you, we’re sure.

But then, that surprise is in the video. So, go on and watch, and we’ll see you on the other side.

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[Alex] In our last video,

we covered the surprisingly large
differences in living standards

between countries.

But how did we get
to where we are?

How did these differences
come about?

Now we're going
to dive into growth rates,

and we're going to see
how they affect prosperity.

So this graph shows
real GDP per capita

in the United States since 1800.

But let's just give
a word of interpretation.

A 1% increase
from a base of 100 -- that's 1.

But a 1% increase from a base
of 1,000 -- that's 10.

So a graph like this
can make it seem

as if the economy is growing
at a faster and faster rate.

Actually, all that's really
going on here

is a change in the base,
in the size of the economy.

So to handle this issue,

we're going to change the graph
to a ratio scale.

This will help us
to see growth rates

a little bit more clearly.

Now, each tick is a doubling.

So here we go from $1,000 to $2,000.

Now, $2,000 to $4,000, and so forth.

The nice thing about these graphs
is that a straight line

means a line of constant growth.

So for example,
here's GDP per capita

in the United States in 1845.
It was around $2,000.

Thirty-five years later, in 1880,
it had doubled to $4,000.

So we know immediately, right,
from the Rule of 70

that the growth rate
over this period

was about 2% per year.

So the lesson from this graph

is that the most basic reason
that the United States is wealthy

is simply that
it's grown consistently

for a long period of time.

We can also use this graph
to do something neat.

We can look
at other countries today

and place them in U.S. history.

For example,
here's Bangladesh and Uganda,

both of which have
a real GDP per capita today,

which is about the same
as the United States had in 1800.

Here's India.
The real GDP per capita today --

about the same
as the United States had in 1880.

Here's China -- about the GDP
per capita of the United States

during the Roaring '20s.

But remember, India and China --
they're growing really rapidly.

So anything I say today
is going to be

a little bit off tomorrow --
they're catching up.

Here's Italy.

It has a GDP per capita today,

which is about what
the United States had around 1980.

I remember 1980.
I got an Atari.

It was pretty good.
Life was good.

So life in Italy is pretty good.

Of course, these comparisons --
they're imperfect.

One reason
is especially interesting.

Every country in the world today
has a greater life expectancy

than even the richest countries
had in 1800.

And that's because poor countries
have benefited from spillovers

from growth in the rich countries --

things like the eradication
of diseases, like smallpox,

the creation of antibiotics,

improvements in the scientific
understanding of sanitation.

So, even countries
which haven't grown

in GDP per capita --

they are a lot better off
in other ways

because of spillovers
from the rich countries.

So these comparisons, yeah,
they're imperfect.

But I do think they can still
give us some intuition

for living standards
in other countries,

and also for how steady growth
improves living standards.

So real GDP per capita
in the United States --

it's doubled
about every 35 to 40 years.

And over several generations,
it's this steady growth,

which results
in monumental increases

in the standard of living.

If things had been different,

if the United States had grown
more slowly, for example --

suppose it had grown by, let's say,
1% per year since 1800 --

then GDP per capita today
would be much lower,

about what we had in 1940.

Now remember, in 1940,
hardly anybody has a car,

they're just getting out
of the Great Depression,

they're about to go to war,
World War II, no televisions.

People in 1940 were pretty poor.

In fact, the average person
in 1940 had an income

that today would put them
below the poverty level.

On the other hand,
if the growth rate had been higher,

suppose it had been 3% per year,

then we would've hit
our current living standards in 1917.

And if we'd continued at that rate,

then today we'd have a real
GDP per capita level of $893,000.

That would've been pretty nice!

At current rates of growth,

we're going
to have to wait until 2159

before we hit that level.

I'm probably not going to make it,
unfortunately...

unless of course,
we can find some way

of increasing our growth rate.

So the lesson here is clear.

It's that even small changes
in growth rates --

they have really big effects
when they're sustained over time.

You might wonder,
"Why did it take so long

for growth in real GDP per capita
to really get going?

Why didn't it happen
before the 1800s?

You know,
why didn't the Industrial Revolution,

why didn't it happen in 1200
or 1200 B.C. for that matter?"

That's a really important question.

And in our next video
from Everyday Economics

with Don Boudreaux,
he's going to take a look

at some of the potential answers
and some of the mysteries

behind that deep
and important question.

[Narrator] If you want
to test yourself,

click "Practice Questions."

Or, if you're ready to move on,

you can click,
"Go to the Next Video."

You can also visit MRUniversity.com

to see our entire library
of videos and resources.

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