Trillions Gained and Lost: Estimating the Magnitude of Growth Episodes

ESID Working Paper No. 26

ESID Methodological Paper No. 1

HKS Working Paper No. RWP14-016

53 Pages Posted: 29 Jan 2014 Last revised: 4 Mar 2015

See all articles by Lant Pritchett

Lant Pritchett

Harvard University - Harvard Kennedy School (HKS); Center for Global Development

Kunal Sen

University of Manchester

Sabyasachi Kar

University of Delhi - Institute of Economic Growth (IEG)

Selim Raihan

University of Dhaka

Date Written: March 1, 2014

Abstract

We propose and implement a new technique for measuring the total magnitude of a growth episode: the change in output per capita resulting from one structural break in the trend growth of output (acceleration or deceleration) to the next. The magnitude of the gain or loss from a growth episode combines (a) the difference between the post-break growth rate versus a counter-factual "no break" growth rate and (b) the duration of the episode to estimate the difference in output per capita at the end of an episode relative to what it would have been in the "no break" scenario. We use three "counter-factual" growth rates that allow for differing degrees of regression to global average growth: "no change" (zero regression to the mean), "world episode average" (full regression to the mean) and "unconditional predicted growth" (which uses a regression for each growth episode to predict future growth based only on past growth and episode initial level). We can also calculate the net present value at the start of an episode of the gain or loss in output comparing the actual evolution of output per capita versus a counter-factual. This method allows us to place dollar figures on growth episodes. The top 20 growth accelerations have Net Present Value (NPV) magnitude of 30 trillion dollars -- twice US GDP. Conversely, the collapse in output in Iran between 1976 and 1988 produced an NPV loss of $143,000 per person. The top 20 growth decelerations account for 35 trillion less in NPV of output. Paraphrasing Lucas, once one begins to think about what determines growth events that cause the appearance or disappearance of output value equal to the total US economy, it is hard to think about anything else.

Keywords: growth magnitude, growth episode, acceleration, deceleration, net present value

Suggested Citation

Pritchett, Lant and Sen, Kunal and Kar, Sabyasachi and Raihan, Selim, Trillions Gained and Lost: Estimating the Magnitude of Growth Episodes (March 1, 2014). ESID Working Paper No. 26, ESID Methodological Paper No. 1, HKS Working Paper No. RWP14-016, Available at SSRN: https://ssrn.com/abstract=2386735 or http://dx.doi.org/10.2139/ssrn.2386735

Lant Pritchett

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-4562 (Phone)
617-496-2554 (Fax)

HOME PAGE: http://ksghome.harvard.edu/~lpritch/

Center for Global Development

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5th floor
Washington, DC 20036
United States

Kunal Sen (Contact Author)

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Sabyasachi Kar

University of Delhi - Institute of Economic Growth (IEG) ( email )

Delhi, 110007
India

Selim Raihan

University of Dhaka ( email )

University of Dhaka
Ramna, Dhaka, 1000
Bangladesh

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