the long run
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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. - PowerPoint PPT PresentationTRANSCRIPT
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The Long RunPart 2:
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Chapter 3
An Overviewof Long-Run
EconomicGrowth
Charles I. Jones
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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.
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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.
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• 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.
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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.
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• 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.
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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.
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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
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• Percentage change between period t and and t + 1
• Finding the growth rate between that same period
Growth Rate
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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
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• The constant growth rule:
Variable value in period t
Initial variable value in period 0
ConstantGrowth Rate
Time Period
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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.
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• 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.
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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.
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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
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Calculating Growth Rates
• The rule for computing growth rates
• This formula can be applied even if the data does not exhibit constant growth.
Solve for growth rate
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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.
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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.
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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!
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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
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• 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:
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Enlarged Table 3.1
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Case Study: Growth Rules in a Famous Example, Yt = AtKt
1/3Lt2/3
• Applying rules of growth rates
• Original output equation:
• Use multiplication rule to get
• Use exponent rule to get
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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
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• 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.
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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?
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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.
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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.
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• 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.
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• 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.
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• Brazil exhibited rapid growth in the 1950s and 1960s and slow growth in the 1980s and 1990s.
• China showed the opposite pattern.
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• 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.
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Additional Tables and Figures for Worked Exercises
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Macroeconomics
This concludes the LectureSlide Set for Chapter 3
byCharles I. Jones
Second Edition
W. W. Norton & CompanyIndependent Publishers Since 1923