GDP | Let us focus on the relative standing of the US in the world economy. Here, T = trillion, B = billion, M = million, etc. GDP = Gross Domestic Product
In 1947, per capita GDP of the US was only about $1700, but has since grown to about $52,000 in 2016, and has not been increasing in recent months. The growth rate has been about 5% per year ($1700 × 1.0570 is roughly $52,000). |
capita = head. per capita = by the head (census was difficult in the Roman Empire, and the "publicani" (tax collectors) were used to collect taxes) | |
four components of GDP | GDP = C + I + G + (X - M) |
Trade Surplus |
US exports to China totaled $69.7 billion while imports from China totaled $337.8 billion in 2008. Thus, US-China bilateral trade deficit was $268 billion in 2008. These charts were made by http://www.economagic.com.
US-China trade deficit was $347 billion in 2016. Trump's tariff virtually had no impact on US-China trade deficit during the past 8 years. |
Japan achieved the most impressive growth record of the post World Wart II era. In 1950, the real per capita GNP of Japan was less than 1/5 that of the U.S. $1,060 compared to $6,330 for the US. However, the Japanese economy grew during the period 1950 - 1980. Japanese real GNP grew at an annual rate of 7.4%. |
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Post WWII growth rates | Real Per Capita GNP (1950/1980 = 1980 $) Country Growth (%) 1950 ($) 1980 ($) US 2 6,330 11,500 Canada 2.3 5,210 10,300 WG 4.9 3,170 13,370 Australia 2.9 3,960 9,400 France 4.4 3,360 12,160 Japan 7.4 1,060 8,900 U.K. 3.2 3,540 9,300 |
If the growth rates were sustained, Japan's income would be higher than that of US before 1990. However, Japan's economy collapsed in the early 1990s, and its growth rate has since declined, which can be attributed to yen appreciation and protectionism. A large economy cannot rely on continued trade surpluses as an engine of growth. China's growth rate has been over 10 percent during the past decade, but its growth has since declined to about 6% this year. In 1945, US GDP was $223 billion (in 1998 dollars) and its population was 140 million. US GDP per capita was only about $1600 in current dollars. China's income per capita today exceeds this amount. In 2019, China's GDP = $14 trillion, growth rate = 7%. (China's premier Li Qechiang does not believe GDP reports are meaningful.) US GDP = $21 trillion, growth rate = 1.6%, but may rise to 3% (best scenario) Some experts predict China's economy will surpass America's before 2030, while others (George Friedman) predict otherwise. |
Doubling Time | Tripling Time | Quadrupling Time |
Rule of 70 | Rule of 110 | Rule of 140 |
70/g = N
g = growth rate (%), N = # of years it takes for a growing variable to double. Some people also use the Rule of Seventy Two (72/g = N). For growth rates less than or equal to 5%, the Rule of Seventy is more accurate than the Rule of Seventy Two, which is more accurate for g > 5%. However, both rules underestimate the actual value of N when g > 10%. Remember that these rules are for approximation purposes only. Use either rule only for growth rates less than or equal to 10%. For more information, read my note on The Rule of Seventy. The same rule can be applied to negative growth, i.e., 70/g is the number of years when the entity halves, where g is the absolute value of the shrinking rate. If the growth rate is 10 percent, (1+0.1)n= 2. |
110/g = N g = growth rate (%), N = # of years it takes for a variable to treble or to third (to reduce to one third) its size. |
140/g = N The Rule of 140 (140/g = N) tells us the number of years it takes for a variable to quadruple or to quarter (to reduce to one fourth) its size. This rule can be obtained by applying the rule of seventy (or seventy two) twice. For growth rates exceeding 5%, Rule of 144 (72 x 2) should be more accurate than the Rule of 140. See David Coutts |
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What if the growth rates exceed 10%? For the purpose of approximation, |
But who is going to remember all these numbers? | So, here is an even more pracrtical way to memorize the above numbers. For every 10% increment in the growth rates above 0%, add 3 more years to the rule of Seventy. In other words, if the growth rate is slightly above 10%, use the Rule of Seventy Three. If the growth rate is 40%, (3 × 4 = 12%, and hence) use the rule of (70 + 12) = 82, etc. This is a useful and practical rule, which slightly deviates from the above numbers. |
What is Gross Domestic Product? | |
Per capita GDP 1991 | World Bank: 1991 (World Development Report, 1993).
Ranking Country Per capita GDP (1991) 1997 1. Kuwait ? 2. Switzerland 33,610 3. Japan: 26,930 42,000 4. Sweden 25,110 5. Norway 24,220 6. Finland 23,980 7. Denmark 23,700 8. Germany 23,650 9. US 22,240 27,700 10. Canada 20,440 11. France 20,360 17. UK 16,550 18. Singapore 14,210 19. Hong Kong 13,430 107. China 370 125. Uganda 170 GDP = gross domestic product. As in "per capita GDP of Beijing," which is above $17,000, we can calculate GDP of a region such as Hong Kong and Macau. This does not mean Hong Kong is a country; it is a special administrative region of China (Hong Kong SDR). |
Problems with GDP | Warning: it is important to note the limitation of GDP when comparing the living standards of countries. These income figures are computed using the current exchange rates. By definition, exchange rates are biased in favor of traded goods because they are based on the prices of traded goods and nontraded goods are ignored. These may not reflect the real standard of living. Americans live in spacious houses and less polluted environment than the Japanese, even though per capital income levels of both countries were about the same in the early 1990s. European Union (2018): GDP = $19.4 trillion, population = 501 million, per capita GDP = $36,500. In reality, consumer prices are much higher than in the US. |
GDP updates |
GDP Ranking 2019 (IMF), world = $87 trillion. CIA estimates of per capita GDP, 2019 Lichtenstein's per capita GDP = $170,000 (2015)[UN] corporate income tax = 12.5%. (1/3 of national income is from the multinational firms, 1/3 is from selling postage stamps), famous for three Nos: No poverty. No crimes, No unemployment. USA is not worried about the decline of its ranking of per capita GDP. US is more concerned with growth of China (#2). |
Population | See World Population Growth, 1998. "Don't Panic--Hans Rosling showing the facts about population To get more information about population, visit Population Reference Bureau. |
Infrastructure | Rebuilding America's Infrastructure (popular mechanics) |
Investment has been neglected during the past two decades. | |
Investment during the Post war period (1945 - 2000) |
Investment/Output Ratio Net I/O US 14% 4% J 27% 17% F 19% 9% G 19% 9% Canada 19% 9% |
Post war savings rate |
Personal savings rate was about 10% of income until 1990, but has since steadily declined, even below zero. Pesonal savings were negative in some years (2005). |
7. Is America declining?
US share of global GDP |
Noting that US share of the global GDP was more than 50%, some argue that America is declining. Since 1980, America's share of the global GDP has been stable around 25%. US GDP as % of Gross World Product about 50% in 1945 From 1980 US share of world GDP has been stable. The World Economy (howmuch.net) It took 30 years for the ROW to recover from the ravages of WWII. (GDPs before 1980 are not suitable for comparing economies.) |
Reasons for slow growth |
(i) US corporate tax rates were among the highest (35%, now lowered to 21%), → FDI outflow occurs (foreign and domestic investors build factories overseas. e.g., Tesla broke ground to build its first non-US factory in Shanghai to produce 500,000 cars per year.) (ii) trade imbalance with Europe and Asia. (reason for trade disputes) If this problem is corrected, US can sustain growth. |
Middle Income Trap |
This refers to a situation in which once per capita income reaches about $10,000 - 12,000, many developing countries stop growing. Exceptions are South Korea, Hong Kong, Taiwan, Singapore, and Chile. It is easy to raise gdp at first. Export promotion policy expedites the growth process in developing countries. As the wage rises, a country can no longer depend on the exports of the labor-intensive goods. Investment in R&D must be constantly made to maintain technological superiority. Without investment in technology and education, there is a limit to growth in the labor-intensive industries. Alternatively, foreign direct investment and financial services can be the source of growth. (as in Hong Kong and Singapore) |
skyscrapers in Shenzhen Shenzhen Stock Exchange is one of two stock exchanges operaring in mainland China, the other being the larger Shanghai Stock Exchange. |
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World Trade | World Trade in 2003, $7 trillion. (GWP in 2003 = $50 trillion) World Trade in 2010, $15 trillion as of 2010. (GWP in 2010 = $66 trillion), 15% growth. World trade increased from $6.5 trillion to $15 trillion. |
China surpassed Japan as #2 after the US in 2010. China's GDP is currently about $11 trillion (2011). |
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RMB | renminbi (yuan in Chinese) is undervalued. This means in real terms China may have higher GDP than the US. |
By 2030, if not sooner, China will surpass the US. | |
automobile | China is the largest producer of automobiles (13.7 million cars in 2010) Japan (7.9 million cars) US (5.7 million cars) China's car market is expected to be 50 million cars per year by 2030. |
Electronic version of Qingming Festival (清明上河圖), China Art Museum, Shanghai |
Bloomberg: China's success comes at the expense of workers and companies throughout the developing world that offer cheap labor but not much else. Even in India, which has some of the planet's lowest wages, low-tech industries can't compete with the Chinese in productivity. Shops in Bombay and Calcutta are flooded with Chinese goods. The Indian government is so worried about China that it has refused to allow Chinese software companies to locate in the high-tech center of Bangalore and scotched plans by software powerhouse Infosys Technologies to train 200 Chinese employees in India. Already, more than 100 million peasants have flocked to the cities in search of work, and that number is likely to increase, adding to China's angry underclass. |
Problems | (i) China's strategy is not sustainable. It has adopted the low yuan policy to maintain a large trade surplus permanently. In 1985, Japan agreed to revalue the Japanese yen, effectively doubling the value of yen, which eliminated Japan's trade surplus since. China has not. US trade deficit means substantial unemployment of low-skilled, blue collar workers in the US. (ii) China's growth crucially depends on its large trade surplus, which is not sustainable in the long run. (iii) US trade deficit with China: $420 billion (increasing) US imports from China in 2018: $540 billion China imports from the US: $120 billion. |
When will China overtake the US? 2029 (Bloomberg) | Here's how fast China's economy is catching up to the U.S. (Malcolm Scott and Cedric Sam) |
HW2 | Scott and Sam predict China will surpass the US in 2029. Are their assumptions on the growth rates valid or not? (2% vs 6%) Justify your answers. |
Multiplier effect | China's spending multiplier is roughly 3. The trade surplus raises China's GDP by roughly $1T. The US will address the issue of the bilateral US-China trade deficit. ⇒ In this case, China's growth rate will be affected. |