Monday, June 30, 2014

Picking Piketty Apart (2) Income and Capital

Capital in the Twenty-first Century has four parts. Part 1 is called income and Capital. It introduced the concepts of national income and the capital income ratio.

National income is defined as the sum of all income available to the residents of a given country in a given years, regardless of the legal classification of that income. Nation income is close related to the idea of GDP… GDP measures the total of goods and serviced produced in a given year within the borders of a given county. In order calculate nation income, one must first subtract from GDP the depreciation of the capital that made this production possible. When depreciate is subtracted from GDP, once obtains net domestic product. Then one must add net income received from abroad (43).
The capital income ratio is an important analytical for assessing the importance of capital.
Income is a flow. It corresponds to the quantity of goods produced and distributed in a given period, (which we generally take to be a year).

Capital is a stock. It corresponds to the total wealth owned at a given point in time. This stock comes from the wealth appropriated or accumulated in all prior years combined.

The natural and useful way to measure the capital stock in a particular country is to divide that stock by the annual flow of income. This gives the capital /income ratio (46).
The capital/income ratio in most developed countries today is about 6. This indicates that the capital stock is about six times the size of national income.

After defining, his terms, the remainder of part one describes how growth in production and output that have evolved since the industrial revolution.
The global distribution of income is more unequal than the distribution of output, because the countries with the highest per capita output are also more likely to own part of the caporal of other countries and therefore receiving a positive flow of income from them… Rich countries are doubly wealthy. They produce more at home, and invest more abroad, so their natural income per head is greater than their output per head. The opposite is true for poor countries (68).
He also notes the increase in per capita incomes.
Much of this spectacular growth occurred in the twentieth century. Globally, the average growth in per capita output of 0.8 percent per year over the period 1700-2012 breaks down as follows: growth of barely to 0.1% in the 18th century, 0.9% in the 19th century and 1.6 % in the 20th century., This equals the multiplication of output by a factor of roughly ten over three centuries (86).
Economic growth led to a transformation of consumption from mostly foodstuffs to manufactured goods and services.

The big transition was from poverty to relative wealth. For all of history, most people have lived at subsistence levels, with no hope of escape. During the 19th century, a new standard of living was achieved for almost everyone. See the hockey stick.

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