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Macroeconomics
Course: Macroeconomics > Unit 8
Lesson 2: National income and inequality- Capital by Thomas Piketty
- Difference between wealth and income
- What is capital?
- Piketty's two drivers of divergence
- Is rising inequality necessarily bad?
- Convergence on macro scale
- Education as a force of convergence
- Gilded Age versus Silicon Valley
- Inverse relationship between capital price and returns
- Connecting income to capital growth and potential inequality
- r greater than g but less inequality
- Return on capital and economic growth
- Critically looking at data on ROC and economic growth over millenia
- Simple model to understand r and g relationship
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Convergence on macro scale
Learn about forces of convergence, like the spread of knowledge, that make the world more equal. It shows how knowledge transfer from West to East has increased Asia's share of global output and per capita GDP, making the world more balanced. Created by Sal Khan.
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Can someone explain how in the second chart Sal talks about, Europe America grows until around 1990 and then declines, but Africa and Asia has been growing since around 1950. How can both be growing and doesn't one need to fall in order for the other to increase. The only thing I can think of is it is due to the fact that growth rates and they can both grow. Or maybe it has to do with the "pie" Sal talks about, getting bigger. Please explain. Thank You.(5 votes)
Please note that the graph says it's 'per capita GDP'. Because of that it's possible for both graphs to go up when the population increases faster in Asia and Africa than in America and Europe.
Here's a little number example to show how that works: let's say there's one American who earns $150 and one Asian who earns $50. The average is (150 + 50) /2 =$100. A few years later the American earns $170, and there are now two Asians who each earn $65. The income of the American increased, and so did the average income of the Asians. However, the average of the whole population is still (170 + 65*2) /3 = $100.(19 votes)
He seemed to imply that it was technical knowledge that drove Asia's increase in per capita GDP. But isn't it more likely that it was political knowledge? Ie, China has slowly been removing political shackles on its economy and embracing more aspects of free market capitalism. (Technical knowledge takes only an instant to go around the world, but political change can take decades.)(7 votes)
you're right to point out politics has a impact on the economy, not only does it decides the framework within which all the factors of production will function, a stable & free political system will attract capital (investments,technology & entrepreneurship).
But since China is still a low cost manufacturing leader with the fastest growing economy averaging double digit growth rate both being under hardcore socialist regime and in current regime which has embraced a mix of free market capitalism and socialism.
It will be unfair to give all the credit to political change and not the knowledge(techniques or skill) as a convergence factor.(7 votes)
- Is it really because of transfer of knowledge that Asia & Africas share of GDP started to grow from 1950. Isn't it because of the independence of british colonies like India after world war II ?(5 votes)
- Complicated things, like the convergence of incomes mentioned in this video, are rarely caused by one factor. I believe the transfer of knowledge is one of the factors that helped share the GDP more equally, but I don't believe it's the only one. Since most colonies got independent around 1950 and that also was the time the GDP started to get spread more equally, it looks like this is another factor.(2 votes)
Could someone explain to me how to read the first graph? Sal talks about areas in the video, but how does the vertical line 'percentages' work here? I mean, in 1700, Europe stands for 30%; America is about 32%; Africa's around 40%; then, Asia area is what puzzles me, for I don't know how to associate the area with the up axis. And the total percentage of EU, Ame and Afri already exceeds 100%, so where's the room for Asia? I am badly confused here. TAT. Thank you if you help me with this.(3 votes)
You shouldn't measure from the x-axis but from the line right below it. In 1700, Europe has 30%, America has about 2%, Africa has about 8%, and Asia has the other 60%.(4 votes)
- It's not clear from the graphs that the spread of knowledge is what causes the convergence between Asia and US-Europe. There are two additional factors which might cause the convergence and lead to the same graphs:
- Increasing trade between the countries, causing factor price (wages, return on capital) equalization between the "West" and other parts of the world
- Capital mobility, which has been increasing in the last decades through friendlier national legislation towards foreign capital, which causes the wages to grow in the country where capital is moved to
Furthermore, the spread of knowledge doesn't necessarily have to increase. For example, global copyright and patents might actually put limits on the spread of knowledge and technology worldwide, and thus increase divergence.
So just by the graphs that Sal presented, it could also be the case that the spread of knowledge around the world is decreasing (global knowledge inequality), while the convergence is caused by trade between continents and capital mobility.(3 votes) 
What does "per capita" mean?(2 votes)- per person. (GDP per capita in the US) = (US GDP)/(US Population)(3 votes)
this is somehow not true. Asia, mainly China, was a closed economy. It developed on its own and learnt on its own this is why its a growing superpower. Sharing of knowledge has been basically from Asia to the west and not vice versa. If china hadnt had a communist economy itd have died out today. It's communism that created the more equal distribution of income in China which today exports to many many countries. The proper allocation of resources is also one of the things that created a more equal distribution of income eg going labour intensive rather than capital intensive considering the amount of labour available.(1 vote)- I think one could make the argument that the Communist Party in China felt a growing threat to its existence if the extreme poverty of the overwhelming percentage of it's population continued much longer. The mantra of Marx's Communist Manifesto, "from each according to his ability, to each according to his needs" justifies the "temporary" control of the Communist Party to take ownership of the means of production and establish the egalitarian conditions wherein the "State" - meaning the Communist government itself - would ultimately no longer be necessary and would ultimately "whither away".
After a half century of Communist Party control and very little to no improvement of the economic conditions of the vast majority of Chinese citizens - other than the party elites - combined with the passing of Mao and many of the original Chinese Communist leaders - Deng Xiaoping changed government policies to incorporate more western, capitalistic economic policies in an attempt to grow the Chinese economy and provide political justification for the Communists remaining in power.
If this is an accurate interpretation of Chinese history during that time, one could argue that China survived because it abandoned its communistic economic ideology and rather embraced western, market oriented economic principles.(2 votes)
Is the main idea of convergence forces to reduce the inequality by stopping the causes of divergence or making up for the causes of divergence by raising the income ?(1 vote)
this might not be a question about this, but i have to know. why can you flag someones question if they are trying to solicit their badges and earn more votes?(1 vote)
it brings down the quality of questions
it would be annoying if the question area was just asking for votes(1 vote)
Video transcript
- [Instructor] We've talked about things that might drive inequality, things that Thomas Piketty refers to as forces of divergence, but I always think about or at least what some of what he cites is
forces of convergence, so forces of convergence or things that might make
the world a more equal place, and the primary one that he cites is one that's very close to my heart, and this is the spread of knowledge. Spread of knowledge. And what we have here
is a couple of charts that show the spread of knowledge at least on a macro basis,
on a regional basis, and show how it has been a driver of starting to equalize global output. As we start in 1700, we see that, it's going from 1700 through
the Industrial Revolution, frankly as the West was
developing or industrializing, the West, Europe and America, became a larger and larger
percentage of global output, and Asia became a smaller
and smaller percentage. But then as you go into the
second half of the 20th century and into the 21st century,
you see the dynamic change. Asia's percentage of world output is increasing more and more, and that's arguably happening because you've had a
transfer of knowledge, a diffusion of knowledge from the West to the East from modern
manufacturing techniques and design techniques and
engineering techniques and whatever else, and that's
why as we are in the beginning of the 21st century Asia is turning into a major industrial powerhouse. They've learned from the
West and in some dimensions are even improving on some of
the knowledge from the West to make themselves more
and more productive. So at least on a regional basis, this shows that the world
is becoming more equal because of this spread of knowledge. And we could also see it
on a per capita basis, so this right over here, they're essentially plotting over time per capita GDP as a
percentage of world average, so the world average right over here is obviously 100% of the world average, so that's why it's just
a flat line at 100%. And we see as we go through
the Industrial Revolution, Europe and America, essentially the West, the West, its per capita GDP becomes a larger and larger percentage of the average per
capita GDP for the globe, but that was true until recently, until the last few decades. The last few decades as a
percentage, it's gone down. Now that doesn't mean that
per capita GDP is going down. It just means that its share as a percentage of world
average is going down, and that's really because
Asia's per capita GDP has been growing even faster because of, once again,
that spread of knowledge. So at least this idea
of spread of knowledge, it does seem to be playing
out at a regional level. It's bringing, at least right now, it seems like Asia's participating
much more than Africa, but it's starting to bring the non-West, the East, more in line with the West in terms of protective capacity and wealth per person and per capita GDP, however you want to look at it. Now an interesting question,
that's at a regional level. What about an individual level? And we'll talk about that
more in the next video.