Chapter 10: Growth – Long run

• Facts of Growth

• From fluctuations (Short and Medium runs) to growth (Long run)

Characterization of three worlds (on average)

1st World: - Rich, Healthy, Educated, Happy

2nd World:- Moderate Income, Moderate Health, Moderate

Education and Moderate Happiness

3rd World:- Poor, Diseases, Low Education, Wars,

Corruption, Depression

Case of US (Real GDP in 2005 dollars)

Case of US (Real GDP per capita in 2005 dollars)

Standard of living

Question: How do we understand whether a country has a higher standard of living than some other country? E.g. China and Luxembourg

China Luxembourg

Standard of living (cont’d)

Potential candidate: GDP

Problem: China’s GDP is 121 times the GDP of Luxembourg. But standard of living in Luxembourg is much higher!

Solution: look at GDP per capita GDP per capita in Luxembourg is 18 times

higher than in China

Standard of living (cont’d)

Is GDP per capita without its problems?- Everything is much cheaper in China (including food, housing, appliances etc.)So, $6000 in China will buy more than $6000 in Luxembourg

Solution: Purchasing Power Parity (PPP)

Look at how much they can purchase with the respective per capita GDP amount.

Growth in advanced countries

Does Money lead to Happiness?

Convergence

Growth Rate of GDP Per Person since 1950 versus GDP per Person in 1950; OECD Countries

ConvergenceGrowth Rate of GDP per Person since 1960, versus GDP Per Person in 1960 (2005 dollars); 76 Countries

Growth – A primer

Did you really think you could dodge math??

Production function:

Y = F(K, N)

• CRS: doubling all factors exactly doubles output• DRS: doubling all factors results in less than a

double increase in output• IRS: doubling all factors results in more than a

double increase in output

Growth – Output per worker

𝑌𝑁

=𝐹 ( 𝐾𝑁 ,𝑁𝑁 )=𝐹 ( 𝐾𝑁 ,1)

• Y/N is output per worker• K/N is capital per worker

We would like to model growth in an economyLet’s consider the contribution of a single worker:

Growth – Output per worker

Under constant returns to scale:Decreasing marginal product of capital: Each added capital unit adds less to output than the previous unit

Growth – Output per worker

What happens when there is a shift in technology?