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Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment

The INSEAD – Israel Research Center. New Alignments in the Global Economic Balance of Power. Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment. Tel Aviv December 2009. Measuring GDP Across Countries.

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Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment

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  1. The INSEAD – Israel Research Center New Alignments in the Global Economic Balance of Power Ilian Mihov Professor of Economics Novartis Chaired Professor of Management and the Environment Tel Aviv December 2009

  2. Measuring GDP Across Countries Production (GDP, 2008). Measured in USD (PPP). World = USD 69.7 Trillion How is GDP at PPP calculated? By using international prices: PAUS*QA + POUS*QO + … Source: World Bank (World Development Indicators, 2008)

  3. Income p.c. time How Big Are World Economies?(according to population) Total World Population (2007): 6.6 Billion What if the poor countries become rich? What will be the size of each economy? If every country has the same income per capita, then the size will be determined by population. Is it happening?

  4. Distribution of World Output (PPP) Emerging:51% Advanced:49% 62% 2010 Note: The graph shows the percentage of world GDP produced by each country or region. The projection for 2015 uses growth assumptions, which are close to recent long-term growth rate estimates Advanced economies 3%, China 10%, India 7.3%, World 5%. Source: WDI (2008).

  5. Characterizing Growth over 130 Years US Real GDP per Capita Log scale. Source: Jones (1995) and WDI (2009)

  6. Forecasting 80 Years Ahead US Real GDP per Capita 3. If you use the fitted trend to forecast US income per capita, you will find that it will multiply by a factor of 4 and will reach $47,401 in 2008 1. Put yourself in 1928. You have data for income per capita since 1870 and have been asked to forecast income per capita in the year 2008. 2. Fit a trend that assumes a constant growth rate Log scale. Source: Jones (1995) and WDI (2009)

  7. Forecasting 80 Years Ahead US Real GDP per Capita Check how well you did. Forecast: $47,401 Actual: $46,716 An error of $685 (or 1.47%) !!!!! Log scale. Source: Jones (1995) and WDI (2009)

  8. Forecasting 80 Years Ahead US Real GDP per Capita “New Economy” 1981 monetary contraction World War II World War I Constant growth (1.85%), but based on continuous effort to innovate, to improve processes, and bounce back after shocks Real GDP PC Oil Shocks Industrialization Railroads The Depression of the 1890s The Great Depression Log scale. Source: Jones (1995) and WDI (2009)

  9. Convergence US UK Germany France Canada Italy Japan

  10. Will we all be rich soon?

  11. Growth Miracles and Growth Disasters Average annual growth rates of GDP per capita (1960-2007)

  12. Some countries converge, others remain poor. Why?

  13. Some countries converge, others remain poor. Why? Productivity Institutions US capital and labor: $4006 US capital: $1292

  14. Asia-Pacific High-Potential Countries US 32000 16000 8000 4000 2000 1000 500 Malaysia Philippines Indonesia Thailand Sri Lanka Vietnam India China

  15. Institutions and Income Good institutions Poor Rich Institutional quality Income per capita Bad institutions

  16. Voice and accountability Political stability Government effectiveness Regulatory quality Rule of law Control of corruption The Role of Institutions Oil producing countries

  17. Voice and accountability Political stability Government effectiveness Regulatory quality Rule of law Control of corruption The Role of Institutions

  18. Balance of Power • The shift of economic power started in the past one or two decades. • Opportunities: Very high growth and high potential for emerging markets. • Will growth continue? Challenges: • Continued regulatory and institutional reform • Unravelling of global imbalances. The global financial crisis may temporarily reduce the speed of convergence. • Shift in the global economic power requires that more responsibility for good policy management falls on the shoulders of China, India, Russia and the other fast growing countries in the world. Inflation risks.

  19. Thanks “The INSEAD Israel Research Center” &

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