Issues in Macroeconomics
7. Economic Growth and Development

The fifth macroeconomic issue is economic growth and development--that is, the ability of an economy to produce and consume at increasing higher levels of output and overall well-being. What matters in the long run, as Adam Smith pointed out, is the nature and sources of the wealth of nations, or, as macroeconomists say, the growth of the economy's real Gross Domestic Product (GDP). To be more precise, what matters is the growth in real GDP per capita (per person). After all, if the population grew faster than GDP, production per person would decline, and there would be no real growth.

Economic growth is measured by the percentage increase in real GDP per capita.

The trend of the rise of real U.S. GDP per capita from 1929 to 2006 is reflected in all manner of important and trivial ways. The average U.S. household now has 1.5 automobiles, as against 0.8 in 1940. In 1950 the average household had 1.9 magazine subscriptions versus 3.1 today. The per capita growth of real GDP has enabled each generation of Americans to be better off than their parents, materially speaking.

To assess the growth of an economy, it is better to ignore short-term fluctuations and to consider the average growth rate over an extended period. For the United States, economic growth has historically averaged around 2.1 percent. During some periods it has been higher - 18.8 percent in 1942 - and during others it has been lower.

The recent growth rates in China, South Korea, and Hong Kong are particularly impressive, a reflection of the so-called "Asian Miracle." The United States has not done as well as Germany, and Argentina's growth rate actually fell between 1980 and 1991. (Argentina has been doing better since 1988, however). Trinidad and Tobago's economy declined drastically during this period.

Along with these variations from nation to nation, several further points are important to consider. First, and obviously, not everyone in a country with a growing economy becomes rich. Even in rich countries a lot of people are left in poverty. The growth of the Brazilian economy has left many people no better off, and possibly worse off, than they were before. Still, even poor Americans are better off today than poor Americans were in 1820. Much better. Economic growth, like many other macroeconomic events, is not neutral in its effects.

Second, not everyone likes what comes with economic growth. A new highway means a loss of unspoiled countryside, or a stressful drive in the car instead of a leisurely walk to the old neighborhood grocery store. A bigger city means more traffic congestion. Increased production means more air pollution. Some people take the view (called "green" in Europe and "environmentalist" in the United States) that economic growth means a bad tradeoff between quality of life and quantity produced.

Third, not all countries are experiencing economic growth. The bleakest poverty is not that of the poor in rich countries but that of the poor in poor countries. The reggae star Bob Marley was raised, as he put it, "in a government yard in Trench Town," a ghetto in Kingston, Jamaica. Income per capita in the ghettos of Kingston is about 1/20th the amount in big city ghettos of the United States. And Kingston ghettos face problems of crime, unemployment, teenage mothers, and underachievement equal to or in excess of those in the United States. The poverty of even the average person in a nation like Bangladesh is hard for Americans to grasp. In 1987 such a person earned 1/36th of what the average person in the United States earned. Imagine living on 1/36th of what you now live on. Imagine giving up 35/36ths of everything you own or might acquire in the future, including housing, food, and clothing. And then stick yourself in the middle of a hot flood plain surrounded by starving children. We return to the important problems of growth and development in Chapter 32.