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The Two Growth Rates of the Economy

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  • Alexander Adamou
  • Yonatan Berman
  • Ole Peters

Abstract

Economic growth is measured as the rate of relative change in gross domestic product (GDP) per capita. Yet, when incomes follow random multiplicative growth, the ensemble-average (GDP per capita) growth rate is higher than the time-average growth rate achieved by each individual in the long run. This mathematical fact is the starting point of ergodicity economics. Using the atypically high ensemble-average growth rate as the principal growth measure creates an incomplete picture. Policymaking would be better informed by reporting both ensemble-average and time-average growth rates. We analyse rigorously these growth rates and describe their evolution in the United States and France over the last fifty years. The difference between the two growth rates gives rise to a natural measure of income inequality, equal to the mean logarithmic deviation. Despite being estimated as the average of individual income growth rates, the time-average growth rate is independent of income mobility.

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  • Alexander Adamou & Yonatan Berman & Ole Peters, 2020. "The Two Growth Rates of the Economy," Papers 2009.10451, arXiv.org.
    • Handle: RePEc:arx:papers:2009.10451
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    References listed on IDEAS

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    1. Fatih Guvenen & Sam Schulhofer-Wohl & Jae Song & Motohiro Yogo, 2017. "Worker Betas: Five Facts about Systematic Earnings Risk," American Economic Review, American Economic Association, vol. 107(5), pages 398-403, May.
    2. Ole Peters & Alexander Adamou, 2018. "The time interpretation of expected utility theory," Papers 1801.03680, arXiv.org, revised Feb 2021.
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    Cited by:

    1. Viktor Stojkoski & Petar Jolakoski & Arnab Pal & Trifce Sandev & Ljupco Kocarev & Ralf Metzler, 2021. "Income inequality and mobility in geometric Brownian motion with stochastic resetting: theoretical results and empirical evidence of non-ergodicity," Papers 2109.01822, arXiv.org.

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