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Long Run Econ Growth Chapter 6-3 The Phases of the Business Cycle Expansion Recession Expansion Total Output Peak 0 McGraw-Hill/Irwin Trough Secular growth trend Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.Mar June Sept. Dec. Mar June Sept. Dec. Mar June © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Long-Run Economic Growth Secular long-run growth, or long-run growth, is the sustained upward trend in aggregate output per person over several decades. A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth. So a central concern of macroeconomics is what determines long-run growth. U.S. real gross domestic product per person from 1900 to 2004 Real GDP Per Capita • As a result of this long-run growth, the U.S. economy’s aggregate output per person was about 7.5 times as large in 2004 as it was in 1900. • The ups and downs of business cycles in the long-run don’t make a difference. Note • Note that there was a 7.5-fold increase in real GDP per capita over the same period in which there was a 20-fold increase in real GDP • The difference in these two numbers is due to a much larger U.S. population in 2004 compared to 1900. For inquiring minds • Long run growth is a relatively modern phenomenon • The idea of being better off than your parents is a new phenomenon Two models in Macroeconomics • Long-run growth is the key to higher wages and rising standard of living. • Sometime what is good in the longrun can be bad in the short run and vice versa. • Example Paradox of Thrift Econ in Action • In the long-run one percent (one point) is a big number. • Because of compounding after 25 years an economy growing at 2.5% will be 30% larger than one that grows at 3.5% • Look at the example in the book comparing the late 1990s to the 1970s