Global Economy
Topic 1: introduction to
quantitative history
Definitions
Real GDP
PPP
Growth accounting
Institutions • The humanly devised constraints which share
human interactions
Sources of growth behind the GDP figures
• Visualise aggregate production function
• 2 sources of growth:
1. Proximate sources of growth
▪ Labour (L) and capital (K) accumulation
▪ Human K accumulation
▪ Technological change
2. Deep determinants of growth
▪ Institutions
▪ Geography
• Theories of growth: Smithian Growth, Solovian Growth, Boserupian Growth, Lewisonian
Growth, Schumpeterian Growth
• Tools to measure sources of growth: Output indexes (GDP), PPPs, growth accounting
Output indexes
• Ways to calculate GDP:
o Expenditure Approach: Y = C + I + G + NX (net exports)
o Income Approach: Y = wL + rK (r is interest rate) + rents (adding all amount people
are paying)
o
1
,Global Economy
• Account inflation using a price series (consumer price indexes) so nominal GDP
becomes real GDP
o Paasche Index
o Laspeyres Index
o Fisher Ideal Index
Problems with Index numbers
1. Choice of index matters
2. Choice of base year matters
3. Quality changes not picked up
4. Real value of new options available not picked up
5. Choice of bundle + weights are subjective
Solving the PPP problem
• Bilateral PPP
o Calculate older + more numerous dates, in specific sectors
o Don’t satisfy transitivity
• Multilateral PPP
o Used for aggregated sectors and do satisfy transitivity
Using indexes to estimate growth: growth accounting
• Growth of output = residual TFP growth + growth of the K contribution + growth of the L
contribution
Issues with growth accounting
1. Have to choose an aggregate production function
2. Need to constrain exponents – national income shares could rapidly change
3. Captures effect of growth but not causes
4. Sensitive to time period
Types of institutions
1. Formal institutions
o Legal system: civil law vs common law
o Political system: parliamentary vs presidential
o Economic system: capitalist vs socialist
o Education system: private vs public vs state
o Health care system: private vs public
2. Informal institutions
2
,Global Economy
o Culture: morals, customs and norms
Why are institutions important for growth?
• Proximate sources of growth (K, L, A) influenced by deep determinants institutions
Approaches to institutions
Efficiency
• People will choose least costly way of transacting
• FPOE = fundamental problem of exchange
Accidental
• Random + unpredictable influences = extreme path dependency e.g. new legislation,
elections and natural disasters
Cultural
• Concept that societies/groups/religious belief determines institutional roles
o Islam vs usury (interest)
Conflict
• Institutions have distributional effects, effecting growth + inequality
• Individuals have beliefs about how output is shared _ what matters which creates
conflict which creates institution development – efficiency isn’t central
3
, Global Economy
Topic 2: introduction to
Quantitative History (L3)
Reasons for advances in income + population
1. Conquest/settlement of relatively empty areas which had fertile land, new biological
resources or a potential to accommodate transfers of population, crops + livestock
2. International trade + capital movements
3. Technological + institutional innovation
2 views of world history
1) Malthusian World View – Rostow, Kuznets and Clark
• Before industrial revolution countries were pretty much all the same with no growth in
output per capita
• After industrial revolution: take-offs were staggered
2) Gradualist world view
• Western Europe was already rich before industrial revolution
• Wealth was product of centuries of slow accumulation based on investment + extra-
European resources + labour
• Growth much more rapid after industrial revolution
4
Topic 1: introduction to
quantitative history
Definitions
Real GDP
PPP
Growth accounting
Institutions • The humanly devised constraints which share
human interactions
Sources of growth behind the GDP figures
• Visualise aggregate production function
• 2 sources of growth:
1. Proximate sources of growth
▪ Labour (L) and capital (K) accumulation
▪ Human K accumulation
▪ Technological change
2. Deep determinants of growth
▪ Institutions
▪ Geography
• Theories of growth: Smithian Growth, Solovian Growth, Boserupian Growth, Lewisonian
Growth, Schumpeterian Growth
• Tools to measure sources of growth: Output indexes (GDP), PPPs, growth accounting
Output indexes
• Ways to calculate GDP:
o Expenditure Approach: Y = C + I + G + NX (net exports)
o Income Approach: Y = wL + rK (r is interest rate) + rents (adding all amount people
are paying)
o
1
,Global Economy
• Account inflation using a price series (consumer price indexes) so nominal GDP
becomes real GDP
o Paasche Index
o Laspeyres Index
o Fisher Ideal Index
Problems with Index numbers
1. Choice of index matters
2. Choice of base year matters
3. Quality changes not picked up
4. Real value of new options available not picked up
5. Choice of bundle + weights are subjective
Solving the PPP problem
• Bilateral PPP
o Calculate older + more numerous dates, in specific sectors
o Don’t satisfy transitivity
• Multilateral PPP
o Used for aggregated sectors and do satisfy transitivity
Using indexes to estimate growth: growth accounting
• Growth of output = residual TFP growth + growth of the K contribution + growth of the L
contribution
Issues with growth accounting
1. Have to choose an aggregate production function
2. Need to constrain exponents – national income shares could rapidly change
3. Captures effect of growth but not causes
4. Sensitive to time period
Types of institutions
1. Formal institutions
o Legal system: civil law vs common law
o Political system: parliamentary vs presidential
o Economic system: capitalist vs socialist
o Education system: private vs public vs state
o Health care system: private vs public
2. Informal institutions
2
,Global Economy
o Culture: morals, customs and norms
Why are institutions important for growth?
• Proximate sources of growth (K, L, A) influenced by deep determinants institutions
Approaches to institutions
Efficiency
• People will choose least costly way of transacting
• FPOE = fundamental problem of exchange
Accidental
• Random + unpredictable influences = extreme path dependency e.g. new legislation,
elections and natural disasters
Cultural
• Concept that societies/groups/religious belief determines institutional roles
o Islam vs usury (interest)
Conflict
• Institutions have distributional effects, effecting growth + inequality
• Individuals have beliefs about how output is shared _ what matters which creates
conflict which creates institution development – efficiency isn’t central
3
, Global Economy
Topic 2: introduction to
Quantitative History (L3)
Reasons for advances in income + population
1. Conquest/settlement of relatively empty areas which had fertile land, new biological
resources or a potential to accommodate transfers of population, crops + livestock
2. International trade + capital movements
3. Technological + institutional innovation
2 views of world history
1) Malthusian World View – Rostow, Kuznets and Clark
• Before industrial revolution countries were pretty much all the same with no growth in
output per capita
• After industrial revolution: take-offs were staggered
2) Gradualist world view
• Western Europe was already rich before industrial revolution
• Wealth was product of centuries of slow accumulation based on investment + extra-
European resources + labour
• Growth much more rapid after industrial revolution
4
