1
00:00:00,000 --> 00:00:04,066
Hi, in this next set of models, we're
going to talk about a very specific thing,

2
00:00:04,066 --> 00:00:08,393
growth. We're going to talk about economic
growth, even more specific, we're going to

3
00:00:08,393 --> 00:00:12,512
ask why is it that some countries are
rich, and other countries are poor. To put

4
00:00:12,512 --> 00:00:16,683
a framework around that, a model around
that, we're going to start out looking at

5
00:00:16,683 --> 00:00:20,333
an even simpler model a model of
exponential growth. So here's a model

6
00:00:20,333 --> 00:00:24,712
where you just put money in the bank and
we talk about sort of the rate at which it

7
00:00:24,712 --> 00:00:28,946
grows and how that accumulates over time.
From that base model, we are then going to

8
00:00:28,946 --> 00:00:32,941
construct a model with a very primitive
economy and show how economies grow. Now,

9
00:00:32,941 --> 00:00:36,835
one of the surprising results of that
model of economic growth is going to be

10
00:00:36,835 --> 00:00:40,579
that there are limits, that without
innovation, growth stops. So we will move

11
00:00:40,579 --> 00:00:44,823
from that simple model to something called
a solo growth model. The solo growth model

12
00:00:44,823 --> 00:00:48,617
allows for there to be innovation and
shows how innovation has this sort of

13
00:00:48,617 --> 00:00:52,212
multiplier effect on our collective
well-being and why innovation is so

14
00:00:52,212 --> 00:00:56,156
important. And then we'll talk a little
bit about some extensions, in particular

15
00:00:56,156 --> 00:01:00,350
we'll talk about once we've got this model
how do we use it to think about why some

16
00:01:00,350 --> 00:01:05,894
countries. Successful in other countries
are, and really what, oh, enables. Growth

17
00:01:05,894 --> 00:01:09,402
to continue over time. Okay so to get us
started; first we just need some basic

18
00:01:09,402 --> 00:01:12,820
definitions. So first, what do I mean by
growth, growth of what? Well you could

19
00:01:12,820 --> 00:01:15,968
think of growth, of overall human
happiness, right? That would be a nice

20
00:01:15,968 --> 00:01:19,656
thing to think about, but that's harder to
measure in some respects, right? So we're

21
00:01:19,656 --> 00:01:22,894
going to focus on the same things
economists do, which is GDP. So this is

22
00:01:22,894 --> 00:01:26,447
Gross Domestic Product. So this is just
the total market value of all the goods

23
00:01:26,447 --> 00:01:30,045
and services produced within an economy,
okay? And there's data kept up, so if you

24
00:01:30,045 --> 00:01:33,553
look here's a whole bunch of countries in
the world and their GDPs. So you see

25
00:01:33,553 --> 00:01:36,971
Luxemburg at the very top, look down a
little ways and you'll see the United

26
00:01:36,971 --> 00:01:40,268
States, right at fifteenth and then, you know, we have
a per-capita GDP of about

27
00:01:40,268 --> 00:01:44,397
47,000 and further down so when you see
Spain and there's very poor countries

28
00:01:44,397 --> 00:01:48,580
where GDP is you know measured in single
digits in thousand dollars per person.

29
00:01:48,580 --> 00:01:53,152
Okay. We wanna know, the like, you know,
what causes growth. So here's sort of an

30
00:01:53,152 --> 00:01:57,233
interesting graph. Right here's Botswana
and Zimbabwe. Now, these countries aren't

31
00:01:57,233 --> 00:02:00,854
the same, right. They're both in Africa.
But they, Botswana only has about

32
00:02:00,854 --> 00:02:04,578
2,000,000 people, Zimbabwe has about
13,000,000 people. So Zimbabwe's much

33
00:02:04,578 --> 00:02:08,607
larger country. But look at GDP, right;
you can see that Zimbabwe has pretty much

34
00:02:08,607 --> 00:02:13,121
stayed flat. Hasn't gone up from 1966 to
2005. Where in contrast right Botswana has

35
00:02:13,121 --> 00:02:17,635
been very successful. So understand what
is it that allows one country to succeed

36
00:02:17,635 --> 00:02:22,205
and another country to not succeed. And
we'll talk about a book by John O Simoglin

37
00:02:22,205 --> 00:02:26,497
James Robinson and called why nations
fail. Which really focuses on this line

38
00:02:26,497 --> 00:02:30,899
here right, like why is it the case that
Zimbabwe hasn't been successful. Now if

39
00:02:30,899 --> 00:02:35,071
you look at GDP. When you talk about
growth it means changes in GDP. Here is

40
00:02:35,071 --> 00:02:39,354
the annual change in real GDP since 1930
in United State. When they said real.

41
00:02:39,354 --> 00:02:43,748
Notice that economist said real. When the
economist said real. What they mean is

42
00:02:43,748 --> 00:02:47,920
taking into account inflation. So
inflation got up by ten percent and the

43
00:02:47,920 --> 00:02:52,259
economy by fifteen percent. You gotta
subtract off that ten percent just due to the

44
00:02:52,259 --> 00:02:56,876
price is rising. Look at GDP and see if you
can notice it. During the war right there

45
00:02:56,876 --> 00:03:01,548
are huge increase of GDP. And let me have
this nice post war fairly growth is fairly

46
00:03:01,548 --> 00:03:06,296
high. You noticed it stays fairly high. So
you know. Averages around you know 3-4

47
00:03:06,296 --> 00:03:10,612
percent throughout this whole. Range
right. You see occasional dips, but

48
00:03:10,612 --> 00:03:15,207
basically, you see fairly you know,
steady concentrates of growth. But if you

49
00:03:15,207 --> 00:03:20,165
look from 2006 to 2011 right, when we had
this contraction, you see this period here

50
00:03:20,165 --> 00:03:24,406
where growth fell. We had massive
decreases in growth and those are you

51
00:03:24,406 --> 00:03:28,567
know, people really feel that right,
because they're much worse off. Now another way

52
00:03:28,567 --> 00:03:32,237
we look at growth, you can ask, sort of,
can you sustain super high levels of

53
00:03:32,237 --> 00:03:35,906
growth? So if you look at China, you see
these sort of unbelievable levels of

54
00:03:35,906 --> 00:03:39,237
growth, right? These things are all in the
8-9 percent range over the last few

55
00:03:39,237 --> 00:03:43,002
decades. Over the last decade and a half,
'cause what you can think is, oh my God,

56
00:03:43,002 --> 00:03:46,768
is China gonna become 50 times the size of
the United States? When I was a kid,

57
00:03:46,768 --> 00:03:50,582
people said the same thing about Japan.
And if you look at Japan's growth rates,

58
00:03:50,582 --> 00:03:54,396
what we see is, again, from 1950 to, you
know the early 1980's, you see these huge

59
00:03:54,396 --> 00:03:58,017
growth rates. But then, if you notice
since then, right, the growth rates have

60
00:03:58,017 --> 00:04:01,644
fallen. So. One of the things this very
simple model will do is explain why that

61
00:04:01,644 --> 00:04:05,382
is the case. Why you can sustain really
high growth rates for a long time and then

62
00:04:05,382 --> 00:04:09,074
have them fall off when you sort of catch
up to the other countries in the world.

63
00:04:09,074 --> 00:04:12,720
Which is why when you look at China even
though you see these high growth rates

64
00:04:12,720 --> 00:04:16,412
now, a lot of people expect those to fall
in the future. We are going to start out

65
00:04:16,412 --> 00:04:20,058
by looking at exponential growth. This is
where you put money in the bank and it

66
00:04:20,058 --> 00:04:23,476
just grows and grows and grows, up, up,
up, up, up. Like this, right. When we look

67
00:04:23,476 --> 00:04:27,230
at economic growth it tends to not look
Way. Over time growth tends to fall off.

68
00:04:27,230 --> 00:04:31,189
And that's because we put money into
things like machinery and technologies but

69
00:04:31,189 --> 00:04:34,802
those depreciate over time and that
prevents us from getting that upward

70
00:04:34,802 --> 00:04:38,761
sloping curve. And so Economic growth is
often going to sort of go the other way

71
00:04:38,761 --> 00:04:42,968
it?s going to start out fast and then tail
off sort of like it did in Japan unless we

72
00:04:42,968 --> 00:04:46,976
can get some innovation, and that will
shift the whole curve up and I'll show you

73
00:04:46,976 --> 00:04:50,738
what I mean in a minute. One last thing
before we get started. When you think

74
00:04:50,738 --> 00:04:54,746
about growth, right that's focusing on
material things material wants and you can

75
00:04:54,746 --> 00:04:58,656
ask yourself okay, does this really matter
shouldn't we be more interested in whether people are

76
00:04:58,656 --> 00:05:02,688
happy. And we probably should be. Right? It's
probably more important that we're happy

77
00:05:02,688 --> 00:05:06,702
than we have a lot of stuff. We could all
trade stuff for happiness. There's a

78
00:05:06,702 --> 00:05:10,403
question. Right? Does GDP, does higher
growth make us happier? Well, that's

79
00:05:10,403 --> 00:05:14,365
actually a fairly complicated question.
So, here's a graph that shows GDP per

80
00:05:14,365 --> 00:05:18,042
capita. And then here's a measure of life
satisfaction. There's a survey data of

81
00:05:18,042 --> 00:05:21,659
life satisfaction. There's a. Notice the
problem here. Gdp is what we can think of

82
00:05:21,659 --> 00:05:25,287
as really hard, 'cause we can measure it.
Life satisfaction is sort of soft, because

83
00:05:25,287 --> 00:05:28,691
you're surveying people. And so, yes,
in one day I can say my life is

84
00:05:28,691 --> 00:05:32,095
great. If you ask me another day, and I
might say, oh, my life isn't that great.

85
00:05:32,095 --> 00:05:35,678
So you've gotta survey a lot of people.
You've gotta make sure you've framed the

86
00:05:35,678 --> 00:05:39,127
question the right way. Still, with all
those caveats, here's what you see. Does

87
00:05:39,127 --> 00:05:42,755
money make you happier? And I wanna focus
on two different parts of this graph. If

88
00:05:42,755 --> 00:05:46,962
you look in this region. The answer is no.
As you go from 20,000 to 60,000 people

89
00:05:46,962 --> 00:05:51,477
just don't get much happier. But if you
look in this region. [sound] The answer's

90
00:05:51,477 --> 00:05:55,789
decidedly yes. Money does make you
happier. Now the reason for this may be

91
00:05:55,789 --> 00:05:59,924
just some basic services, like health
care, food, shelter. Those sorts of

92
00:05:59,924 --> 00:06:04,649
things. So getting from zero to 10,000,
that's huge. Getting from 30,000 to 60,000

93
00:06:04,649 --> 00:06:09,197
maybe that doesn't matter that much. So
lifting people out of poverty clearly

94
00:06:09,197 --> 00:06:13,412
makes them happier. That's one reason to
focus on GDP. Now, once you?re making

95
00:06:13,412 --> 00:06:17,797
$100,000 [laugh] a year, it may not make
you any happier to make $120,000 a year.

96
00:06:17,797 --> 00:06:22,182
What we give. Does growth make you happy
at least according to the survey data?

97
00:06:22,182 --> 00:06:26,443
Yes, if you?re lifting poor people up. No,
if you?re making rich people richer. Okay.

98
00:06:26,443 --> 00:06:29,696
So that's the framework for what we're
gonna do. We're going to start out by

99
00:06:29,696 --> 00:06:33,376
talking about exponential growth and then we're
gonna move on to economic growth models and

100
00:06:33,376 --> 00:06:36,671
we'll do three with a simple economic
growth model, we'll do something called

101
00:06:36,671 --> 00:06:39,924
Solow's growth model, and then I'll
talk just a tiny bit about something

102
00:06:39,924 --> 00:06:42,920
called endogenous growth models. All
right. Let's get started. Thank you.