Archive | October 2016

Would Mr Trump be able to increase the USA’s growth rate to 6%?

Among the many controversial statements in the third presidential debate, there was one that struck me, but that was not picked up by the moderator or Mrs Clinton. Mr Trump complained that the growth rate of the USA’s GDP is only currently about 1% per annum, while that of the Indian and Chinese economies is around 6%, implying that, if he were elected president, he could make the USA’s growth rate increase comparably.

However, I consider that this argument ignores some mathematical and economic facts.

Firstly, the USA is the largest economy in the world with a GDP of about $18,561,930 million in 2015. If that increases by 1%, it represents an absolute increase of $185, 619 million. The Indian economy is starting at a much lower level of $2,250,990 million (thank you, Wikipedia). A 6% increase on this lower figure, only adds $135,059 million to its GDP. So the larger percentage increase is equivalent to a smaller absolute increase.

Admittedly, a 6% increase on China’s present GDP of $11,391,619 million is a larger figure of $683,497 million. However, if one then considers GDP/capita, the USA’s is increasing annually by $561.8 (on average, of course—many people in the USA have experienced a fall in their income due to rising inequality), while China’s is increasing by the smaller figure of $488.5, and India’s is only increasing by $63.84.

More significantly, economic considerations suggest that a 6% growth rate is unachievable for the USA at its present level of development. Until recently, much economic activity in China and India was due to subsistence farming or to activities in informal markets which were not fully registered in GDP statistics. As workers began to leave small, unproductive family firms to work in factories in the cities, as transactions became increasingly monetized, and as, overall, factors of production (particularly labor and land) began to be more efficiently utilized (and more productive due to rising education levels), these economies could achieve remarkably high increases in GDP statistics.

As an economy that is already developed, with a very small agricultural sector that already has substantial economies of scale and high levels of capital, the USA cannot achieve growth merely by shifting factors from low productivity to high productivity sectors. Undoubtedly, it could and probably will achieve a higher level of growth than 1%, once the global economy recovers fully (there is still a hangover from the recession sparked by the 2008 financial crisis), to reach a rate of perhaps 3%. But I am sceptical that Mr Trump, despite his apparent successes in business, could steer the economy to reach growth rates as high as 6%.

 

 

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