Economic Growth

Economic growth cumulates over time, however. An annual growth rate of 2 percent means that real GDP per person is about 2.6 times higher than half a century ago. To put it another way, each generation is roughly twice as rich as the previous generation. Although there are periods of high and low (sometimes even negative) growth in GDP per person, these fluctuations are overwhelmed by the overall positive growth in our economy. With this growth come many benefits: higher consumption, more varieties of goods, higher quality goods, better medical care, more enjoyable leisure time, and so on. Figure 6.1 Real GDP per Person in the United States, India, and Niger

Real GDP per person in the United States (a) is substantially larger than (b) real GDP in India and Niger. The growth experiences of the three countries are also very different Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011. Part (b) of Figure 6.1 “Real GDP per Person in the United States, India, and Niger” shows real GDP per person for India and Niger. Notice first that the scale on this graph is very different. In 1960, real GDP per person in the United States was about $15,000 (measured in year 2005 dollars). In Niger and India, it was about 5 percent of the US figure—about $700 per person. The second striking feature of this graph is the very different performance of India and Niger. India, like the United States, has grown: GDP per person is much higher at the end of the sample than at the beginning. Indeed, India has grown faster than the United States: the average growth rate over the period was 3.1 percent. Over the last two decades, the difference is even starker: India has grown at about 4.4 percent per year on average. Nevertheless, the United States is still a lot richer than India. By world standards, India is a long way from being the poorest country. In 1960, Niger was richer than India on a per person basis. But in the following half century, Niger became poorer, not richer. GDP per person decreased by almost 30 percent. India in 2009 was six times richer than Niger. Statistics on GDP are just that—statistics—and it is easy to look at graphs like these and forget that they are telling us about the welfare of human beings. But imagine for a moment that Niger had managed to grow like India, instead of collapsing as it did. People would not be surviving by eating grass, infants would be more likely to grow up to be adults instead of dying of preventable diseases, and children would be learning to read and write. This is why the study of economic growth matters. And this is why, in this chapter, we take on arguably the most important question in the entire book.