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Summary Macroeconomics Chapter 9
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Summary of 8 pages for the course Macroeconomics at UL
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Economics
Chapter 9 - Long Run Economic Growth
Comparing Economies - Across Time and Space
Real GDP per Capita
The key statistic used to track economic growth is: real GDP per capita
—> real GDP divided by the population size.
We focus on GDP because it measures the total value of an economy’s production of final goods and
services as well as the income earned in that economy in a given year.
▪ We use real GDP to separate changes in the quantity of goods and services from the effects of a
rising price level.
▪ We use real GDP per capita to isolate the effect of changes in the population
This serves as a useful summary measure of a country’s economic progress per time
Today, about 50% of the world’s people live in countries with a lower standard of living than the United
States had a century ago
Growth Rates
Long-run economic growth is normally a gradual process in which real GDP per capita grows at most a few
percent per year.
Rule of 70: A mathematical formula that tells us how long it takes real GDP per capita, or any other variable
that grows gradually over time to double. It can only be applied to a positive growth rate.
Formula: Number of years for variable to double = 70
Annual growth rate of variable
Example: If GDP grows 2% per year, it will take only 35 years to double
In the U.S. real GDP per capita rose on 1.9% per year, applying the rule of 70 to this implies that it should
have taken 37 years for real GDP per capita to double. So for U.S real GDP capita to double three times, it
would have taken 111 years (3 x 37)
Countries with a successful real GDP per capita growth: China and India
Countries with a disappointing real GDP per capita growth: Argentina and Zimbabwe
What explains these differences in growth rates?
The Sources of Long-Run Growth
Long-run economy growth depends almost entirely on rising productivity, but other factors affect the growth
of productivity as well.
The Crucial Importance of Productivity
Sustained economic growth occurs only she the amount of output produced by the average worker increases
steadily
Labor productivity / productivity: Output per worker (or in some cases output per hour )
For the economy as a whole productivity is real GDP divided by the number of people working
▪ For short periods of time, an economy can experience a burst of growth in output per capita by putting a
higher percentage of the population to work (in the US during World War II)
▪ Over the longer run, the rate of employment growth is never very different form the rate of population
growth
▪ In general, overall real GDP can grow because of population growth, but any large increase in real GDP per
capita must be the result of increased output per worker —> due to higher productivity
Explaining Growth in Productivity
There are three main reasons why the average US worker today produces more than a century ago:
1. Increase in physical capital: Manufactured resources such as building and machines. Physical capital
makes workers more productive
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