Global Inequality and Economic Growth Flashcards

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Measuring Global Income and Inequality

• Real GDP per Capita: Defined as $\text{Real GDP} / \text{Population}$; it does not account for income distribution.

• Comparative Data (2022 US$):

  • Australia: GDP $1,693$B; per capita $65,009.8$

  • China: GDP $17,963$B; per capita $12,720.2$

  • US: GDP $25,440$B; per capita $76,329.6$

• International Dollars: They adjust for inflation and cost of living differences for better purchasing power comparison.

The Solow Growth Model and Capital Accumulation

• Production Function: Output ($Y$) increases through Labor ($L$), Capital ($K$), and Technology.

• Capital-Labour Ratio ($k$): Per capita output depends on capital per labor unit ($y = f(k)$), with diminishing returns.

• Capital Accumulation Equation: $K_{t+1} = (1 - \text{d})K_t + I_t$, where $\text{d}$ is the depreciation rate and $I$ is investment.

• Steady-State: This is where per capita investment equals the maintenance requirement ($(n + \text{d})k$).

• Convergence: Poorer countries are expected to grow faster to catch up with richer ones.

The Golden Rule and Optimal Savings

• Thrift/Welfare: Higher savings lead to an increased capital-labour ratio; overall welfare is impacted by consumption levels.

• Golden Rule Saving Rate: This is the savings rate that maximizes steady-state per capita consumption, occurring where the output line is tangent to the maintenance line.

Technology and the Middle-Income Trap

• Technological Shifts: Advancements improve income steady states; better technology enhances capital-labour ratios and drives innovation.

• Middle-Income Trap: Countries that fail to innovate during their growth phase may stagnate after initial success.

Population Growth and the Poverty Trap

• Maintenance Requirements: Increased population growth raises the maintenance line, reducing the capital-labour ratio and per capita output.

• Malthusian Trap: Economic progress can be offset by rapid population growth, leading to sustained poverty.

Institutional Factors and Property Rights

• Institutions: Weak legal frameworks, conflicts, and inefficient bureaucracy can impede economic growth.

• Property Rights: Secure property rights positively correlate with income levels; a high risk of expropriation can lower national income.