Long-Run Economic Growth

1. Long-Run Economic Growth

2. Real GDP per Capita • Key statistic to track economic growth • Real GDP (adjusted for inflation) per capita (to remove effect of population changes) • Income of “typical” family normally grows in proportion to per capita income

3. Growth Rates • Long-run growth is achieved gradually • At any given annual growth rate, use Rule of 70 to determine how long it takes real GDP to double # of years to double = 70/annual growth rate

4. Sources of Long-Run Growth • Key to long-run growth is rising productivity • Output per worker (GDP/number of people working) • In the long-run, population growth tends to explain employment growth (real GDP per capita negates this effect)

5. Factors of Growing Productivity • Physical capital – Increases in manufactured goods used to produce other goods & services • Human capital – Improvement in education & knowledge • Technology – Progress in technical means for production – Increases Total Factor Productivity

6. Aggregate Production Function • APF is a formula economists use to separate out the effects of the 3 factors • Diminishing returns to physical capital – Increases in amount of physical capital leads to smaller increases in productivity • Diminishing returns for tech and human capital as well • Growth accounting estimates contribution of each major factor in APF

7. Natural Resources • Ceteris paribus, countries with abundant valuable resources have higher RGDP per capita • In the real world, the other 3 factors are much more important determinants

8. Case Studies – What has been the economic outcome for each of the following, and why? Convergence hypothesis – Difference in real GDP per capita narrows over time because countries that start with lower GDP per capita tend to have higher growth rates