Growth Rates Are Crucial

Growth Rates Are Crucial


♪ [music] ♪ [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. ♪ [music] ♪

26 Comments

  1. ahmed wahid says:

    So wonderful. thank you very much

  2. bobby says:

    India's GDP is 1/5 of China's… why its Real GDP per capita is more than half of China's

  3. Jiaming Xie says:

    Thank you very much!! The video is pretty good!

  4. HettGutt says:

    It is far more beneficial in the long run to protect our genetic infrastructure, instead of having a .1% higher growth rate. Having a GDP per capita of $31,000 instead of $30,000 won't matter when we're South Africa or Brazil.

  5. Thomas Edgerley says:

    Have you done a video on the GINI equality index?

  6. Craig Morrin says:

    there is something else that requires constant growth in order to survive: cancer. Capitalism is unnatural, and unsustainable. It is impossible for anything to grow continuously without it either collapsing…or destroying itself.

  7. Adam Hartstein says:

    I'M GOING TO MAKE IT!

  8. Diamondeye Diamondeye says:

    300 years of free labor has a huge roll.

  9. Joe Pittman says:

    You guys are the beez kneez!!!

  10. David Ramos says:

    By spill overs do you mean foreign aid?

  11. vini 399 says:

    superb explanation!!

  12. Walter Clark says:

    Man, it's a good thing we have government burden to keep us from having out of control prosperity.

  13. Aditya Jaiswal says:

    gladd that i found this channel was always interested in economics but couldnt get the right resources,or otherwise couldnt afford them but this is amazing ,learning from such great professors sitting in my home this could not get any better ,god bless MRU university

  14. Roland Roland says:

    It would be interesting to see an inflation adjusted chart of GDP growth for the USA over that same time scale

  15. tumza relaxing says:

    I wish you had also Compared Germany GDP & Britain GDP with USA for the same Period just to see how they fair since Britain has or Germany GPD are high. while on subject of money and economy Why is Britain have High Value of Currency, yet still the world measures itself relative to america Dollar. im talking about Pound not Euro. the most exporting country is Germany yet Britain has the highest Currency?

  16. tran tam says:

    good channel for learning English and primary economic

  17. APOKOLYPES says:

    interested to know how these projections are adjusted for inflation – great video thanks for making it!

  18. MAINAK MAJUMDAR says:

    wonderful presentation Sir on GDP

  19. warrcc c says:

    well, none of these statements are completely accurate, because, for example, you said that in the 40's nobody had a TV, but wait! there were no TVs! at least there was no TV culture, so nobody cares. But everybody had a radio, and the radio was the mass media king on those eras. Besides, in the 1940's or 1930's, the dollar has a much more purchasing power than today and every family could live with one income. Now, we have a lot stuff, right, but that doesn´t mean that is better than those years. Now, Every couple had to work, and sometimes both incomes aren´t enough! there are more poverty right now because the purchasing power of the dollar has fade away.

  20. vipulraj dharmakar says:

    simplest answer of your question is we didn’t had this term or explanations before, moreover people actually had a locked treasure but now if we talk only about manufacturing as very base level its pretty good for understanding growth. thank you so much for videos.

  21. Tomas Av. says:

    Propaganda video!!! Gdp means nooothing. Usa prins money in such rate that gdp of usa is no longer a thing. Its a fictional number of worthless usa dollar. Your whole macro economics videos is nonsense bullshit to brainwash americans.

  22. tdreamgmail says:

    Real GDP per capita doesn’t show that real wages haven’t risen in 50 years. The 1% have taken all that growth for themselves.

  23. vijayk gondi says:

    Sir,what is potential Growth and Actual growth.

  24. Mohamed Al-Zakwani says:

    Best to learn from. Excellent quality of explaination and illustration materials.

  25. Eda Zohre says:

    Do anyone know how they did those animations? Which program they use :/

  26. MA TE R IA LI ST says:

    Growth isn't a force in and of itself. The index doesn't illustrate in any way the colossal inequality, US imperialism, or slavery that really drives growth

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