Facts to be explained
In this introductory chapter, Weil discusses the aim of the book as well as the important questions that the book answers. The main aim of this chapter is to help the reader to acquaint himself or herself with the topics that the author discusses in the subsequent chapters of the book as well as get the basic flow of the authors works. This part is important, especially for someone with little or no prior knowledge of what development economics entails.
The chapter introduces topics such as the reasons why some countries are richer or poorer than others are. According to the author, this aspect depends on several concepts. For instance, he explains that wealth is a relative term that is definable in various ways. Wealth can be explained from various perspectives including the population point of view, a country’s gross domestic product (GDP), and the military ability.
A country can rank high if the factor under consideration is the gross domestic product and rank lower in the event that the factor in consideration changes to military ability. The author gives an illustration of data from the year 2005 where the United States ranks as the top country out of eleven countries chosen in terms of their GDP. When the variable changes to population, China takes the lead instead.
Weil also states that the difference in the level of income among countries is a factor that contributes greatly as one of the reasons why some countries are richer than others, which he attributes to various reasons. One such reason is the historical factors present in a given country.
Countries that had higher economic growth during the years that followed the Second World War mostly retained this growth, thus ranking better than those that did poorly during the same period. This observation makes sense for the developmental changes that took place during that specific period were different for different countries.
However, some countries such as Japan and other countries that were poor and experienced drastic developmental changes also moved up a few ranks higher than other countries that were previously at the same level.
Another factor the author explains in a more in-depth manner in the book is the method of the comparison made in the determination of the level of economic growth. He states that there is a considerable difference when the basis of determination of economic growth is the total gross domestic product as opposed to a scenario where the determinant factor is the gross domestic product per capita.
The main difference between these two is that the GDP per capita is the gross domestic income calculated yearly. The Total GDP is calculated cumulatively over the determinant period, which is usually more than a year, but sometimes less. The difference in the rate of income growth among countries also plays a significant role in the determination of why countries are richer than others are.
For instance, although the economic growth of the United States was slower during the recession, it was still higher than India’s economic growth during a boom. Various factors determine such difference in growth rates that the author explains in subsequent chapters of the book.
When working with growth rates, Weil suggests that using data from recent decades is a good way of doing it. He gives examples of comparisons done between the growth rates of several countries before the year 1820 and those from subsequent years, after 1820.
A framework for analysis
This chapter underscores the importance of data analysis in the determination of economic growth as well as the determination of various other factors that contribute to economic growth. Weil indicates that data assist in the accurate determination of variables that affect economic growth and thus aids in the formation of appropriate economic policies, both in microeconomics and macroeconomics.
To start with, he gives a parable of two states, viz. Sylvania and Freedonia. Freedonia produces 36,000 bags of potatoes and 18,000 bags of tea. In contrast, its neighbor, Sylvania, produces 18,000 bags of potatoes and 36,000 bags of potatoes for its consumption. The question that the author poses is what both states would have if Freedonia traded its Potatoes to Sylvania and Sylvania traded all its tea to Freedonia.
The answer is that Freedonia would have 36,000 bags of tea as well as potatoes and Sylvania would have the same. The part that makes it a parable is the fact that each state would seem to have an extra 18,000 bags of either tea or potatoes that do not participate in the trade. In explaining this, the author makes it clear that there needs to be an amount left for consumption and trade within each country.
In practice, this parable is applicable to choices that countries have to make in determining what to produce and trade in the endeavor to grow their economies. He goes further to explain that the best choice for both countries would be to focus on what they produce most and sell it. That way, the two countries benefit without the danger of ending up with more than they need. The aim of this move is to reduce the input and maximize the output.
Weil also expounds the importance of data in the creation of accurately efficient policies by using two examples of data processing methods, viz. scatter plots and correlations, and randomized controlled trials. Scatter plots are large bodies of data that resemble regular line graphs in their format. They show how different variables relate to each other and the effect that one variable can have to another.
The way each variable relates to the other is via correlation. The closer the data points come to making a straight line, the higher the correlation meaning that both variables have a big effect on each other. This aspect is helpful in the determination of what variables to keep constant and the ones to adjust. The variables can be any aspect of the economy from population to unemployment.
Randomized controlled trials usually occur in medical research. They involve the random experimentation of various forms of treatment on groups of individuals with exactly the same qualifications and in the same conditions. Control groups are groups of individuals used in experiments.
A comparison between these two methods reveals that although they are both effective, the randomized controlled trials seem more speculative, while the scatter plots are more factual and specific. The randomized controlled trials also generally take longer that the scatter plots in data analysis.
Weil adds that data collected in the past is usable in the present by assessing it for patterns, which makes it easier to make decisions that impart a sense of urgency. For instance, data collected during the great depression could have been usable in evaluating the economic crisis that occurred in 2007/2008.
Population and economic growth
The population of a country has an important role to play in the economic growth of a country. In this chapter, Weil explains the connection between population and economic growth. He explains how the rate of growth of the population affects economic growth. He also explores some of the factors that affect population growth and how they result in a variation in the growth of the economy.
There is no clear way of establishing whether growth in population leads to a growth in the economy or not. For this reason, various quantitative methods have been set up over the years to be in a position to bring a sense of predictability to the situation. This move is mainly for the purposes of policy making by governments. The author explains two different modules, viz. the Malthusian model and the Solow model.
The Solow module was the earliest attempt to try to model long-term economic growth in an analytical manner. The module was the work of Robert Solow and Trevor swan. The model mainly exhibits the connection between several factors namely capital goods, labor, investment, and the resultant output.
In essence, higher population growth would cause a dilution in the applicable capital input. The model is a series of equations that the two scholars first used in the 1950s. However, when using it, Weil advises that it is best to use data as recent as possible in order to achieve desirable results.
The Malthusian Model was developed during the industrial revolution era, after World War 2. It worked on the premise that technological growth led to a growth in the population. However, other factors such as food supply and the availability of other resources balanced this growth. These factors had the effect of reducing per capita income. The result was a stagnation that was eventually broken by the industrial revolution.
Innovations that formed the basis of the industrial revolution had the effect of increasing the economic growth way above population growth. The input was much less than the output thus creating favorable conditions for economic growth. Weil also explains population growth by looking at the factors that contribute to its growth namely fertility and mortality rates.
The mortality rate is a calculation of the life expectancy of a given population. A high mortality rate means that the life expectancy is low, and vice versa. Usually, this factor is calculated using the number of births put against the number of deaths that occur in a population. The result is an expression of the number of years on average that a person should expect to live.
Low mortality rates mean that on average, every person has high chances of living longer. This aspect also means fewer deaths hence a higher growth in population. The author also infers that higher economic growth results in lower fertility for many people choose to work as opposed to giving birth and taking care of children.
This aspect is a matter of quality against quantity. Although the situation leads to the birth of fewer children, the children get better quality lives. These children tend to get a better education and do better in the labor market, thus causing an increase in economic growth. Fewer children mean a decrease in human capital (in the form of education and healthcare services) and a better output due to quality education, thus growth in the economy.
Technology also plays a vital part as far as fertility is concerned. The development of various birth control options leads to a variety of options for women of childbearing age in a given population to choose. It also gives them control over the time they want to have children.
As a result, a country may experience higher population growth in some years and lower growth in others. The result of this scenario is an erratic system that makes it hard to estimate the rate of population growth and consequently the economic growth rate. The government thus has to collect independent data every year in order to make calculations on such estimates.
Human capital
The author explains human capital to be the input that the government has to apply to improve the quality of the people that contribute to the economy, which is, in essence, the entire population. The government has to invest in the betterment of the population to obtain the best in terms of labor and consequently the best quality output over the result.
In this chapter, Weil gives some of the forms of human capital that governments invest in during their operations. Health is one of the forms that he mentions as crucial investments for the government. He explains that a healthier work force is more likely to give a better output and grow the economy because people will not spend the precious working time visiting healthcare facilities or lying on beds back at home due to sicknesses.
Countries with poor healthcare may have large workforces but produce little output, and as Weil explains, this assertion holds for a quality labor force produces quality output that is larger in quantity. For example, India’s population is one of the largest populations across the world, which means that compared to the United States, it has a greater work force.
However, due to the state of healthcare, the workforce in India is of inferior quality as compared to that in the United States. The result is that the output in the United States is greater and thus the economic growth is higher.
Another form of human capital that the author mentions is education. He gives a description of the effect that education has on economic growth. According to Weil, the better quality in education has the effect of raising the level of economic growth for it improves the quality of labor available in the country. He adds that human capital in the form of education costs less in comparison to the lack of such an investment.
Any excess in the good quality labor force is also advantageous to the country as the excess labor force is easy to export when it is of good quality.
Therefore, even though in some instances high populations seem to lower economic growth by causing a high input-low output situation (like the example of India given earlier), this scenario is reversible by looking at the high population in terms of a trade commodity. The country can export excess labor as a means of increasing the gross domestic product and consequently the level of economic growth.