Growth Rates are Crucial
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0:00 - 0:04♪ [music] ♪
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0:13 - 0:14[Alex] In our last video,
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0:14 - 0:18we covered the surprisingly large
differences in living standards -
0:18 - 0:20between countries.
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0:20 - 0:22But how did we get
to where we are? -
0:22 - 0:24How did these differences
come about? -
0:24 - 0:27Now we're going
to dive into growth rates, -
0:27 - 0:29and we're going to see
how they affect prosperity. -
0:29 - 0:32So this graph shows
Real GDP per capita -
0:32 - 0:35in the United States since 1800.
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0:35 - 0:37But let's just give
a word of interpretation. -
0:38 - 0:42A 1% increase
from a base of 100 -- that's 1. -
0:42 - 0:46But a 1% increase from a base
of 1,000 -- that's 10. -
0:49 - 0:51So a graph like this
can make it seem -
0:51 - 0:55as if the economy is growing
at a faster and faster rate. -
0:56 - 0:59Actually, all that's really
going on here -
0:59 - 1:03is a change in the base,
in the size of the economy. -
1:03 - 1:05So to handle this issue,
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1:05 - 1:08we're going to change the graph
to a ratio scale. -
1:08 - 1:10This will help us
to see growth rates -
1:10 - 1:11a little bit more clearly.
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1:11 - 1:14Now, each tick is a doubling.
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1:14 - 1:17So here we go from $1,000 to $2,000.
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1:17 - 1:20Now, $2,000 to $4,000, and so forth.
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1:20 - 1:23The nice thing about these graphs
is that a straight line -
1:23 - 1:26means a line of constant growth.
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1:27 - 1:30So for example,
here's GDP per capita -
1:30 - 1:34in the United States in 1845.
It was around $2,000. -
1:35 - 1:40Thirty-five years later, in 1880,
it had doubled to $4,000. -
1:40 - 1:44So we know immediately, right,
from the Rule of 70 -
1:44 - 1:47that the growth rate
over this period -
1:47 - 1:49was about 2% per year.
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1:49 - 1:51So the lesson from this graph
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1:51 - 1:56is that the most basic reason
that the United States is wealthy -
1:56 - 1:58is simply that
it's grown consistently -
1:58 - 2:01for a long period of time.
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2:01 - 2:03We can also use this graph
to do something neat. -
2:03 - 2:05We can look
at other countries today -
2:05 - 2:08and place them in U.S. history.
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2:09 - 2:12For example,
here's Bangladesh and Uganda, -
2:12 - 2:16both of which have
a real GDP per capita today, -
2:16 - 2:21which is about the same
as the United States had in 1800. -
2:21 - 2:25Here's India.
The real GDP per capita today -- -
2:25 - 2:28about the same
as the United States had in 1880. -
2:29 - 2:32Here's China -- about the GDP
per capita of the United States -
2:32 - 2:35during the Roaring '20s.
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2:35 - 2:38But remember, India and China --
they're growing really rapidly. -
2:38 - 2:40So anything I say today
is going to be -
2:40 - 2:43a little bit off tomorrow --
they're catching up. -
2:44 - 2:45Here's Italy.
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2:45 - 2:47It has a GDP per capita today,
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2:47 - 2:50which is about what
the United States had around 1980. -
2:51 - 2:53I remember 1980.
I got an Atari. -
2:54 - 2:56It was pretty good.
Life was good. -
2:56 - 2:58So life in Italy is pretty good.
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2:59 - 3:02Of course, these comparisons --
they're imperfect. -
3:02 - 3:05One reason
is especially interesting. -
3:05 - 3:11Every country in the world today
has a greater life expectancy -
3:11 - 3:14than even the richest countries
had in 1800. -
3:14 - 3:18And that's because poor countries
have benefited from spillovers -
3:18 - 3:20from growth in the rich countries --
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3:20 - 3:23things like the eradication
of diseases, like smallpox, -
3:23 - 3:25the creation of antibiotics,
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3:25 - 3:28improvements in the scientific
understanding of sanitation. -
3:28 - 3:30So, even countries
which haven't grown -
3:30 - 3:32in GDP per capita --
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3:32 - 3:34they are a lot better off
in other ways -
3:34 - 3:37because of spillovers
from the rich countries. -
3:37 - 3:40So these comparisons, yeah,
they're imperfect. -
3:40 - 3:43But I do think they can still
give us some intuition -
3:43 - 3:45for living standards
in other countries, -
3:45 - 3:49and also for how steady growth
improves living standards. -
3:49 - 3:52So real GDP per capita
in the United States -- -
3:52 - 3:55it's doubled
about every 35 to 40 years. -
3:56 - 4:00And over several generations,
it's this steady growth, -
4:00 - 4:04which results
in monumental increases -
4:04 - 4:05in the standard of living.
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4:06 - 4:07If things had been different,
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4:07 - 4:10if the United States had grown
more slowly, for example -- -
4:10 - 4:15suppose it had grown by, let's say,
1% per year since 1800 -- -
4:15 - 4:18then GDP per capita today
would be much lower, -
4:19 - 4:22about what we had in 1940.
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4:22 - 4:25Now remember, in 1940,
hardly anybody has a car, -
4:25 - 4:27they're just getting out
of the Great Depression, -
4:27 - 4:31they're about to go to war,
World War II, no televisions. -
4:31 - 4:33People in 1940 were pretty poor.
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4:33 - 4:38In fact, the average person
in 1940 had an income -
4:38 - 4:42that today would put them
below the poverty level. -
4:42 - 4:45On the other hand,
if the growth rate had been higher, -
4:45 - 4:48suppose it had been 3% per year,
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4:48 - 4:53then we would've hit
our current living standards in 1917. -
4:53 - 4:56And if we'd continued at that rate,
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4:56 - 5:02then today we'd have a real
GDP per capita level of $893,000. -
5:02 - 5:04That would've been pretty nice!
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5:04 - 5:06At current rates of growth,
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5:06 - 5:08we're going
to have to wait until 2159 -
5:08 - 5:10before we hit that level.
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5:10 - 5:13I'm probably not going to make it,
unfortunately... -
5:13 - 5:16unless of course,
we can find some way -
5:16 - 5:18of increasing our growth rate.
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5:18 - 5:20So the lesson here is clear.
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5:20 - 5:24It's that even small changes
in growth rates -- -
5:24 - 5:28they have really big effects
when they're sustained over time. -
5:28 - 5:30You might wonder,
"Why did it take so long -
5:30 - 5:34for growth in real GDP per capita
to really get going? -
5:34 - 5:38Why didn't it happen
before the 1800s? -
5:38 - 5:40You know,
why didn't the Industrial Revolution, -
5:40 - 5:45why didn't it happen in 1200
or 1200 B.C. for that matter?" -
5:45 - 5:47That's a really important question.
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5:47 - 5:50And in our next video
from Everyday Economics -
5:50 - 5:52with Don Boudreaux,
he's going to take a look -
5:52 - 5:55at some of the potential answers
and some of the mysteries -
5:55 - 5:58behind that deep
and important question. -
5:59 - 6:00[Narrator] If you want
to test yourself, -
6:00 - 6:02click "Practice Questions."
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6:02 - 6:04Or, if you're ready to move on,
-
6:04 - 6:06you can click,
"Go to the Next Video." -
6:09 - 6:12You can also visit MRUniversity.com
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6:12 - 6:14to see our entire library
of videos and resources. -
6:14 - 6:17♪ [music] ♪
- Title:
- Growth Rates are Crucial
- Description:
-
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.
Macroeconomics Course: http://www.mruniversity.com/courses/p...
Ask a question about the video: http://www.mruniversity.com/courses/p...
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Macro
- Duration:
- 06:22
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