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Part 2: The Long Run Chapter 3 An Overview of Long-Run Economic Growth Charles I. Jones 3.1 Introduction • In this chapter, we learn: – some facts related to economic growth that later chapters will seek to explain. – how economic growth has dramatically improved welfare around the world. • this growth is actually a relatively recent phenomenon. 3.1 Introduction • In this chapter, we learn: – some tools used to study economic growth, including how to calculate growth rates – why a “ratio scale” makes plots of per capita GDP easier to understand. • The United States of a century ago could be mistaken for Kenya or Bangladesh today. • Some countries have seen rapid economic growth and improvements to health quality, but many others have not. 3.2 Growth over the Very Long Run • Sustained increases in standards of living are a recent phenomenon. • Sustained economic growth emerges in different places at different times. – Thus, per capita GDP differs remarkably around the world. • The Great Divergence – The recent era of increased difference in standards of living across countries. • Before 1700 – Per capita GPD in nations differed only by a factor of two or three • Today – Per capita GPD in differs by a factor of 50 for several countries. 3.3 Modern Economic Growth • Timeline: From 1870 to 2000, United States per capita GDP… – rose by nearly 15-fold • Implications for you? – A typical college student today will earn a lifetime income about twice his or her parents. The Definition of Economic Growth • Growth of per capita GDP – The exact rate of change of per capital GDP. • A percentage change – The change between two periods divided by the value of the variable in the initial period. • Percentage change in GDP between period t and and t + 1 “new” GPD “old” GPD • Percentage change between period t and and t + 1 • Finding the growth rate between that same period Growth Rate A Population Growth Example • Population (L below) also works this way. • Intuitively, tomorrow’s population in time period t + 1 depends on today’s population in period t • The constant growth rule: Time Period Variable value in period t Initial variable value in period 0 Constant Growth Rate The Rule of 70 and the Ratio Scale • The Rule of 70 – If y grows at a rate of g percent per year, then the number of years it takes y to double is approximately equal to 70/g. • Notes – Small differences in growth rates result in large differences over time. – The time it takes to double only depends on the growth rate and not the initial value. • A ratio scale – Plot where equally spaced tick marks on the vertical axis are labeled consecutively with numbers that exhibit a constant ratio – When plotted on a ratio scale, a variable that grows at a constant rate will be a straight line. U.S. GDP on a Ratio Scale • If a variable is growing at a constant rate it will be a straight line on a ratio scale • If growth rates are rising, the slope will be increasing. U.S. GDP on a Ratio Scale • Per capita GDP in the United States has grown at approximately 2 percent per year over the last 130 years. – Easy to see with a ratio scale – Approximately linear Calculating Growth Rates • The rule for computing growth rates Solve for growth rate • This formula can be applied even if the data does not exhibit constant growth. 3.4 Modern Growth around the World • After World War II, growth in Germany and Japan accelerated. • Convergence – Poorer countries will grow faster to “catch up” to the level of income in richer countries. • Brazil had accelerated growth until 1980 and then stagnated – China and India have had the reverse pattern. A Broad Sample of Countries • Over the period 1960 – 2007 – Some countries have exhibited a negative growth rate – Other countries have sustained nearly 6 percent growth – Most countries have sustained about 2 percent growth. • Small differences in growth rates result in large differences in standards of living. Case Study: People versus Countries • Since 1960: – The bulk of the world’s population is substantially richer – The fraction of people living in poverty has fallen • A major reason for changes – Economic growth in China and India – 40 percent of the world population! 3.5 Some Useful Properties of Growth Rates • Growth rates of ratios, products, and powers follow several simple rules. • Growth rates obey mathematical operations that are a level simpler than the operation on the original variable. – Variables Divided Growth Rates subtracted – Variables Multiplied Growth Rates added – Variable taken to a Power number Growth rate multiplied by that number • Suppose two variables x and y have average annual growth rates of gx and gy, respectively. • Assume also that gz is the average annual growth rate of z • Then the following rules apply: Enlarged Table 3.1 Case Study: Growth Rules in a Famous Example, Yt = AtKt1/3Lt2/3 • Applying rules of growth rates • Original output equation: • Use multiplication rule to get • Use exponent rule to get 3.6 The Costs of Economic Growth • The benefits of economic growth – Improvements in health – Higher incomes – Increase in the variety of goods and services • Costs of economic growth include – Environmental problems – Income inequality across and within countries – Loss of certain types of jobs • Economists generally have a consensus that the benefits of economic growth outweigh the costs. 3.7 A Long-Run Roadmap • Are there certain policies that will allow a country to grow faster? • If not, what about a country’s “nature” makes it grow at a slower rate? Summary • Sustained growth in standards of living is a very recent phenomenon. • If the 130,000 years of human history were warped and collapsed into a single year, modern economic growth would have begun only at sunrise on the last day of the year. Summary • Modern economic growth has taken hold in different places at different times. • Since several hundred years ago, when standards of living across countries varied by no more than a factor of 2 or 3, there has been a “Great Divergence.” • Standards of living across countries today vary by more than a factor of 60. • Since 1870 – growth in per capita GDP has averaged about 2 percent per year in the United States. – per capita GDP has risen from about $2,500 to more than $37,000 • Growth rates throughout the world since 1960 show substantial variation – Negative growth in many poor countries – Rates as high as 6 percent per year in several newly industrializing countries, most of which are in Asia. • Growth rates typically change over time. • In Germany and Japan – Growth picked up considerably after World War II – Incomes converged to levels in the United Kingdom. – Growth rates have slowed down as this convergence occurred. • Brazil exhibited rapid growth in the 1950s and 1960s and slow growth in the 1980s and 1990s. • China showed the opposite pattern. • Economic growth, especially in India and China, has dramatically reduced poverty in the world. • In 1960 – 2 out of 3 people in the world lived on less than $5 per day (in today’s prices). • By 2000 – this number had fallen to only 1 in 10. Additional Tables and Figures for Worked Exercises This concludes the Lecture Slide Set for Chapter 3 Macroeconomics Second Edition by Charles I. Jones W. W. Norton & Company Independent Publishers Since 1923