Long-Run Economic Growth

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

Real GDP per Capita

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

Growth Rates

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)

Sources of Long-Run Growth

1. Physical capital – Increases in manufactured goods used to produce other goods & services

2. Human capital – Improvement in education & knowledge

3. Technology – Progress in technical means for production – Increases Total Factor Productivity

Factors of Growing Productivity

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

Aggregate Production Function

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

Natural Resources

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

Case Studies – What has been the economic outcome for each of the following, and why?

South Korea Latin America Sub-Saharan Africa

high national savings rate

lower rates of savings & investment

limited growth in education & infrastructure

very good educational system

low education emphasis

low levels of investment spending

substantial tech progress

political instability no legal safeguards for property