James d. Gwartney

Read:
Gross Domestic Product—What is it and how is it measured?
Now, take a good look at what has happened since 1820. During the past two hundred
years, there has been a virtual explosion of economic growth. By 2003, the world’s income per
person had risen to $6,516, ten times the level of 1820. In the West, by 2003 income per person
had soared to $23,710, nearly twenty times the figure for 1820. Thus, after experiencing
centuries of income levels at or near subsistence, real per capita income has skyrocketed
during the past two hundred years.

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Exhibit 5: GDP per Capita (1990 dollars)
$25,000
$15,000
$10,000
$5,000
$0
$20,000
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2003
Year
West GDP per Capita
World GDP per Capita
1820: $667
1820: $1,202
2003: $6,516
2003: $23,710
Source: Angus Maddison, Contours of the World Economy, 1–2030 AD: Essays in Macro-Economic History (Oxford:
Oxford University Press, 2007).
The pattern of life expectancy was similar. Life expectancy at birth for the world rose
from 24 years to 26 years between 1000 and 1820, but it then increased to 31 years in 1900
before soaring to 64 years in 2003. In the West, life expectancy rose from 24 years to 36 years
between 1000 and 1820, but by 2003 it had reached 76 years.
As history illustrates, economic growth does not occur automatically. Why do some

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countries grow and achieve high levels of income while others stagnate? What institutions and
policies will promote growth and higher living standards? This section examines these vitally
important questions.
(18)
Before we do, however, it is worth adding a cautionary note about the measurement of
GDP, especially with respect to post-communist countries. A definition that seems simple such
as “value of final output of goods and services” masks a host of difficult questions. For
something traded in a free market, establishing value is easy. But what about something subject
to price controls? Should it be valued at what people actually paid or what they would have
paid in a free market? Should the value of time spent queuing be included? What about output
that is not traded? If soldiers are conscripted, how should their labor be evaluated? How well
can statistical authorities capture the output in the underground (grey or black) market? If I
bake a pizza at home, the value of the cheese is included but not my time in the kitchen. On the
other hand, if I buy the pizza from a restaurant the labor is included in the GDP. Yet, assuming
you are as good a cook as the chef, it is an identical pizza.
The difficulty in measuring GDP and related price changes creates problems in
understanding the early years after the collapse of communism. The official statistics show a
huge drop in output—but this is inconsistent with the actual experience of citizens.
(19)

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