SOME FACTS ON GROWTH

Economic Growth Defined

Economic growth means growth in the amount of goods and services produced—in total, or per capita. For some purposes, growth in total output is most important—for example, in assessing a nation’s economic potential for fighting a war, its ability to provide large amounts of foreign aid, and the like. But for most purposes we are more interested in output per capita (or per family)—that is, growth in the ratio:

total output
........................
total population

For output per capita provides a total population rough measure of the average standard of living of individuals in the economy. You will find “economic growth” used widely in both senses, but here economic growth will mean growth in output per capita unless growth in total output is specified.

The two definitions can color the facts quite differently. If total output grows but population grows even faster, the standard of living of the typical individual is sliding down, not rising. In this country, total output has risen on the average between 3 and 4 per cent annually over the last century, while output per capita has risen only about 2—3 per cent per annum as population grew about 1 per cent per annum. In India, total output has grown too, recently, at a rate not far under ours, but population has grown as fast as output. Hence there has been little change in output per capita, and the Indian standard of living today is little, if any, higher than it was a century ago.

Economic Growth in Perspective

Look back at Table 1-1 and then ahead to Table 18-1 to get a first picture of the results of subh widely varying economic growth rates over the world today. The United States stands at the top. We are far ahead of the nearest challengers— even though we are a much newer nation than many of the others shown. The success story of the American economy is ,wr.itten in these figures, in the spectacular results of our economic growth over a mere two or three centuries of the world’s history.

Second, what about comparative growth rates for major industrialized countries over the last century? Table 15-1 tells the story. Growth rates have varied widely even among such industrialized nations. Although some rates are surprisingly close (for example, those of the United States and Sweden), don’t forget the enormous difference that even a fraction of one per cent annually can make when compounded over an entire century. Beginning from a level of 100, a growth rate of 1.5 per cent per annum would give a total of 443 in 100 years; a growth rate of 2 per cent 725; and a growth rate of 3 per cent 1,922. A difference of even a half per cent in the annual growth rate can make a huge difference in comparative living standards over only a few generations.

* Based on data for approximately 100 years. Exact beginning dote varies slightly; for example, U.S. data begin in 1871 to ovoid Civil War period. Data from D. C. Poige, “Economic Growth: The Lost Hundred Years,” Notional Institute Economic Review, July 1961; Simon Kuznets, “The Pattern of U.S. Economic Growth,” The Nation’s Economic Objectives (E. Edwords, ed.; Chicogo: U. of Chicogo Press, 1964); and United Notions.

Try matching up these rates with the present standings shown in Table 1-1. When, for example, did the United States gain its present big advantage over Japan, Sweden, and the U.S.S.R.? Does our relatively late industrialization explain much of our excellent performance over the past century compared to most European nations which had already partly industrialized by the 1860’s? How about Japan, which began to industrialize very late? Tables like these explain why economic historians and economic theorists have a fascinating time explaining the facts.

One last introductory look at the facts. What about recent comparative growth rates? Although the U.S. has been a spectacular success over the long pull, are we maintaining our outstanding record?

Table 15-2 gives the answer. Since World War TI we have grown faster than over the previous century. But a number of other nations have done still better, especially Japan, West Germany, and the U.S.S.R. And the order is very different from those of Tables 1-1 and 15-1.

* Based on United Nations and International Monetary Fund data; in real terms.

A word of warning is needed here, however. Growth figures for any short period are tricky, and the years in Table 15-2 reflect partly special circumstances growing out of World War-TI. Indeed, in the last few years the European nations shown in the table have been slowing down, while the U.S. has speeded up a bit. Certainly the long-term rates in Table 1 5-1 are of greater historical significance. But there’s no getting around the fact that our growth rate has been below the leaders’ since World War II.

The Difference Between
Growth and Cycle Upswrngs

It is important to distinguish betweer~ longrun growth rates and short-run swings reflecting business-cycle fluctuations. For example, output per capita usually rises rapidly as an economy moves from depression to high employment. But this is clearly a temporary factor, and should not be extrapolated out as a long-run growth rate. Thus, most economists look upon the long-run growth rate as something to be measured only over extended periods which cover at least the years from one cycle peak to another, and preferably several cycles. Alternatively, they look at the growth in the “full-employment capacity” of the economy—that is, its growing capacity to produce at “full employment” of men and machines.