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Module 37:Long-run Economic Growth

Created By: Alondra Montes, Nathaniel Leoncini, David Rodriguez and Jordan Lebron

Looking at Economies Over Time

There are several sources that lead to long-run economic growth

Before observing these sources, we’ll first look at how the U.S. economy has grown over time

The key indicator of long-run growth is real GDP per capita

Real GDP per Capita

Key statistic to track economic growth

Definition: real GDP divided by the population size

Tells us how much of the national GDP an individual accounts for

Should not be a policy goal to increases but is a good measure of economic progress

Why use Real GDP per Capita as an Indicator

GDP accounts for the total value of final goods and services in an economy in a given year

Real GDP eliminates the effects of rising price levels (inflation)

Real GDP per Capita isolates the effect of change in population size

Table 37.1 U.S. Real GDP per CapitaRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

U.S. Real GDP per Capita

The U.S. economy has seen great growth in the last century

In 2008, the economy produced 684% as much per person as it did in 1908

This means an individual produces almost seven times what they did a century ago

U.S. Real GDP per Capita

Family income typically grows proportional to per capita income

So a 5% increase in income per capita would roughly result in a 5% increase in family income

Figure 37.1 Economic Growth in the United States, India, and China over the Past CenturyRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Economic Growth Comparison

The previous slide compared economic growth (Real GDP per capita) of the U.S., India, and China

Despite great growth of the U.S. economy, not all nations have experienced the same growth

Actually, many nations have a standard of living only equal to or less than that of the U.S. in 1908

China and India

China has seen their economy grow by leaps and bounds in the past few decades

Despite great growth, they only have a standard of living equal to the U.S. in 1908

India has also seen growth, but at a much less rapid pace

They have yet to reach 1908 levels seen in the U.S.

Figure 37.2 Incomes Around the World, 2008Ray and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Incomes Around the World

Much of the world remains poor in comparison to the industrialized nations

The majority of these nations are in North America, Europe, and some Pacific nations

50% of the world lives in countries with a lower standard of living than the United States in 1908

Growth Rates

Long-run economic growth is usually a gradual process

Real GDP per capita will generally only grow a few percentage points every year

To show a relationship between the annual growth rate in real GDP per capita and change in the long run, economist use what is known as the Rule of 70

Rule of 70

A mathematical equation that tells us the time it takes a variable that grows gradually over time to double

Number of years for a variable to double =

70/annual growth rate of variable

Figure 37.3 Comparing Recent Growth RatesRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

How to Apply Rule of 70

China’s current level of economic growth is 8.8%

Applying the Rule of 70, we can determine how long it will take for China’s economy to double

70/8.8 = 8

In approximately 8 years, China’s economy will have doubled

In 24 years, the economy will have doubled 3 times, making the economy 8 times bigger 8 x 3 = 24 2 x 2 x 2 = 8

Sources of Long-run Growth

Long-run economic growth is reliant on rising productivity.

Sustained growth in real GDP per capita occurs only when the amount of output produced by the average worker increases steadily. This happens because of increased productivity

Labor productivity, or productivity is output per worker.

Sources include: Physical Capital, Human Capital and Technology

Physical Capital

Definition: consists of human-made goods such as buildings and machines used to produce other goods and services.

Examples of this would be using a sewing as opposed to sewing it by hand or in car manufacturing plants the robots that assist in putting the car together.

Human Capital

Definition: the improvement in labor created by the education and knowledge of members of the workforce.

An example of this would be firms requiring their employees to have a college degree. A higher number of people are attaining college degrees as opposed to a century ago.

Technology

Definition: the technical means for the production of goods and services

Examples of this would be computers, calculators and cars.