Module 37:
Long-run Economic
Growth
Created By: Alondra Montes, Nathaniel Leoncini, David Rodriguez
and Jordan Lebron
S
Looking at Economies Over Time
S There are several sources that lead to long-run economic
growth
S Before observing these sources, we’ll first look at how the
U.S. economy has grown over time
S The key indicator of long-run growth is real GDP per capita
Real GDP per Capita
S Key statistic to track economic growth
S Definition: real GDP divided by the population size
S Tells us how much of the national GDP an individual
accounts for
S Should not be a policy goal to increases but is a good
measure of economic progress
Why use Real GDP per Capita as
an Indicator
S GDP accounts for the total value of final goods and services
in an economy in a given year
S Real GDP eliminates the effects of rising price levels
(inflation)
S Real GDP per Capita isolates the effect of change in
population size
Table 37.1 U.S. Real GDP per Capita
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
U.S. Real GDP per Capita
S The U.S. economy has seen great growth in the last century
S In 2008, the economy produced 684% as much per person
as it did in 1908
S This means an individual produces almost seven times what
they did a century ago
U.S. Real GDP per Capita
S Family income typically grows proportional to per capita
income
S So a 5% increase in income per capita would roughly result
in a 5% increase in family income
Figure 37.1 Economic Growth in the United States, India, and China over the Past Century
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Economic Growth Comparison
S The previous slide compared economic growth (Real GDP
per capita) of the U.S., India, and China
S Despite great growth of the U.S. economy, not all nations
have experienced the same growth
S Actually, many nations have a standard of living only equal
to or less than that of the U.S. in 1908
China and India
S China has seen their economy grow by leaps and bounds in
the past few decades
S Despite great growth, they only have a standard of living
equal to the U.S. in 1908
S India has also seen growth, but at a much less rapid pace
S They have yet to reach 1908 levels seen in the U.S.
Figure 37.2 Incomes Around the World, 2008
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Incomes Around the World
S Much of the world remains poor in comparison to the
industrialized nations
S The majority of these nations are in North America,
Europe, and some Pacific nations
S 50% of the world lives in countries with a lower standard of
living than the United States in 1908
Growth Rates
S Long-run economic growth is usually a gradual process
S Real GDP per capita will generally only grow a few
percentage points every year
S To show a relationship between the annual growth rate in
real GDP per capita and change in the long run, economist
use what is known as the Rule of 70
Rule of 70
S A mathematical equation that tells us the time it takes a
variable that grows gradually over time to double
S Number of years for a variable to double =
70/
annual growth rate of variable
Figure 37.3 Comparing Recent Growth Rates
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
How to Apply Rule of 70
S China’s current level of economic growth is 8.8%
S Applying the Rule of 70, we can determine how long it will take for
China’s economy to double
S
70/
8.8 = 8
S In approximately 8 years, China’s economy will have doubled
S In 24 years, the economy will have doubled 3 times, making the
economy 8 times bigger
S 8 x 3 = 24
S 2x2x2=8
Sources of Long-run Growth
S Long-run economic growth is reliant on rising productivity.
S Sustained growth in real GDP per capita occurs only when
the amount of output produced by the average worker
increases steadily.
S This happens because of increased productivity
S Labor productivity, or productivity is output per worker.
S Sources include: Physical Capital, Human Capital and
Technology
Physical Capital
S Definition: consists of human-made goods such as
buildings and machines used to produce other goods and
services.
S Examples of this would be using a sewing as opposed to
sewing it by hand or in car manufacturing plants the robots
that assist in putting the car together.
Human Capital
S Definition: the improvement in labor created by the
education and knowledge of members of the workforce.
S An example of this would be firms requiring their
employees to have a college degree. A higher number of
people are attaining college degrees as opposed to a century
ago.
Technology
S Definition: the technical means for the production of goods
and services
S Examples of this would be computers, calculators and cars.