3.2 History’s income hockey sticks

In the last 200 years, living standards have increased much more in some countries than in others.

gross domestic product (GDP)

A measure of the total output of goods and services produced in an economy in a given period. GDP combines in a single number all the output (or production) carried out by the firms, nonprofit institutions, and government bodies within a country. Household production is part of GDP if it is sold.

To compare living standards in each country, we start with gross domestic product (GDP), which measures how much is produced in a particular country in a year. GDP is a country’s “output.” The economist Diane Coyle explains that GDP “adds up everything from nails to toothbrushes, tractors, shoes, haircuts, management consultancy, street cleaning, yoga teaching, plates, bandages, books, and the millions of other services and products in the economy.”¹

Listen to Diane Coyle talking about the benefits and limitations of measuring GDP.

gross domestic product (GDP) per capita

A measure of the market value of the output of the economy in a given period (GDP) divided by the population.

GDP equals the total market value of all goods and services produced in an economy in a given period, which corresponds to the total income of everyone in the country. We divide GDP by the total population and use the resulting number—GDP per capita—as a measure of average income or living standards. The higher the GDP per capita is, the higher the average income and living standards are.

purchasing power parity (PPP)

Purchasing power parity is a price index that measures how much it costs to purchase a basket of goods and services in a specific country compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 2011.

To compare average living standards across countries and over time, economists use the concept of purchasing power parity (PPP) to account for the differences in prices of goods and services. PPP is a price index that measures how much it costs to purchase a basket of goods and services in a specific country compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 2011.

correlation

A statistical association observed between two variables in a sample of data. If high values of one variable (such as people’s earnings) commonly occur along with high values of another variable (such as years of education), then the variables are positively correlated. When high values of one variable (such as air pollution) are associated with low values of the other variable (such as life expectancy), then the variables are negatively correlated. Correlation doesn’t mean that there is a causal relationship between the variables. For example, air pollution may not have caused the lower life expectancy we observed.

Although GDP per capita takes into account the total output of goods and services that we want or need, such as haircuts, toothbrushes, or education, it does not consider things that directly affect how “well off” we feel, such as the quality of our physical environment, including clean air and personal safety, and the goods and services produced within households, such as home-cooked meals or child care. Nonetheless, GDP per capita correlates highly with several measures of well-being, such as life expectancy and people’s satisfaction with their life.

Our world in data (OWiD) shows the relationship between GDP and happiness and GDP and life expectancy. Read Data Extension 3.2 to learn about an alternative indicator of well-being.

In Figure 3.1, the height of each country’s line is an estimate of average living standards at the date on the horizontal axis. Notice the following:

• In 1600, living standards were higher in Italy than in any of the other countries for which we have data.
• By 2018, people were six times better off, on average, in Japan than in India, while people in the United States were three times better off than people in Mexico. People in Japan were nearly as rich as those in the United Kingdom, but people in the United States were even better off.

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https://books.core-econ.org/uoe-101/03-02.html#figure-3-1

Figure 3.1 History’s hockey stick: gross domestic product per capita in eight countries (1490–2022).

View the interactive graph at OWiD View static graph

Bolt, Jutta and Jan Luiten van Zanden. 2024. Maddison style estimates of the evolution of the world economy: A new 2023 update, Journal of Economic Surveys; Broadberry, Stephen. 2021.Accounting for the Great Divergence: Recent findings from historical national accounting, Cage Research Centre Working Papers (549/2021). Total Economy Database.

Hockey sticks and growth

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An ice hockey stick.

We call figures like Figure 3.1 hockey stick curves because of the lines’ resemblance to the shape of an ice hockey stick: a flat part, then a sharp twist or “kink” where the curve begins to grow steeply. History’s hockey stick is shaped differently for different countries. Notice the following facts from the graph in Figure 3.1:

• The flat part of the hockey stick shows that living standards did not grow in any sustained way for much of history (1490 to around 1800 for most countries).
• The hockey stick kink is less abrupt in the United Kingdom, where gradual growth began around 1650.
• In Italy and Japan, growth began around 1870 with a sharper kink occurring around 1940.
• In China and India, the kinks happened much later—in the second half of the twentieth century.

growth

We say that a country’s economy grows when its GDP per capita increases over time (positive growth rate). If the GDP per capita decreases over time, then the economy shrinks (negative growth rate). A growth rate is a percentage change. The formula to calculate a percentage change is: \(\frac{(\text{new number} ‐ \text{old number})}{\text{old number}}\). For example, if Country A had GDP per capita of 10,000 in Year 1 and GDP per capita of 10,200 in Year 2, then Country A experienced economic growth of 2% \(\frac{(10,200 ‐ 10,000)}{10,000} = 0.02\), or 2% growth in per capita GDP.

Continuous positive growth began at different times and rates in different countries, leading to vast differences in living standards between countries. Since late in the twentieth century, India and China have been catching up with the richer nations, but for some countries, such as Haiti, living standards remain below the level of the United Kingdom’s living standards 200 years ago. Understanding why some countries have prospered while others have not is one of the most important topics that economists have studied. One founder of the field, Adam Smith, gave his most important book the title An Inquiry into the Nature and Causes of the Wealth of Nations.² What lies behind the upward kink in the hockey sticks that we have seen in some countries, but not others?

An entertaining video by Hans Rosling, a statistician, shows how some countries got richer—and healthier—much earlier than others.