Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Why are some countries rich and others poor?

Of all the questions in economics, this is the big-un. Why are living standards in rich countries such as the US so much higher than in poor countries like Bangladesh? (To give you an idea: average annual income in the US is over $50,000, while in Bangladesh it’s around $1,000.) Can Bangladesh take any actions to make its people richer? If so, what are they?

These kinds of question are so pressing and so important that the Nobel Prize–winning economist Robert Lucas said that, ‘once one starts to think about them, it is hard to think about anything else’.

Macroeconomists aren’t obsessed with this question because they’re obsessed with money and riches in and of themselves. Instead, countries with high incomes tend to have other things that people care about: lower infant mortality, longer life expectancy, better healthcare and education, and so on. In surveys, people in richer countries also tend to report higher levels of life satisfaction. So although being richer isn’t the be-all and end-all, it certainly matters. In many poor countries – where large numbers of people live without basic needs such as enough food to eat, a roof over their heads or basic sanitation – increasing people’s incomes is a necessary step towards improving their lives.

In order to become richer, countries need economic growth. An economy is said to grow when the total amount of goods and services that it can produce increases. Economic growth is usually expressed as a percentage change over a year: if the UK economy grows by 2 per cent this year, that means it can produce 2 per cent more ‘stuff’ this year than the year before.

Small differences in growth rates can make a big difference over long periods of time. For example, if an economy grows at 2 per cent a year, it takes about 35 years to double in size. If, however, it’s able to increase its growth rate to 4 per cent a year, the economy doubles in only 18 years. If it grows at 10 per cent a year, it doubles in just 7 years!

So you can see why finding ways of boosting economic growth (especially in poor countries) is high on the agenda for macroeconomists.