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KW_Macro_Ch_08_Sec_01_Comparing_Economies_Across_Time_and_Space

# KW_Macro_Ch_08_Sec_01_Comparing_Economies_Across_Time_and_Space

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>> Long-Run Economic Growth Section 1: Comparing Economies Across Time and Space chapter 8 Before we analyze the sources of long-run economic growth, it’s useful to have a sense of just how much the U.S. economy has grown over time and how large the gaps are between wealthy countries like the United States and countries that have yet to match our growth record. So let’s take a look at the numbers. Real GDP per Capita The key statistic used to track economic growth is real GDP per capita —real GDP divid- ed by the population. We focus on GDP because, as we learned in Chapter 7, GDP 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 because we want to separate changes in the quantity of goods and services from the effects of a rising price level. We focus on real GDP per capita because we want to isolate the effect of a change in the population. For example, other things equal, an increase in

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the population lowers the standard of living for the average person—there are now more people to share a given amount of real GDP. A rise in real GDP that only match- es population growth leaves the average standard of living unchanged. Although we learned in Chapter 7 that growth in real GDP per capita should not be a policy goal in and of itself, it does serve as a very useful summary measure of a coun- try’s economic progress over time. Figure 8-1 shows real GDP per capita for the United States, India, and China, in 2002 dollars, from 1900 to 2003. (We’ll talk about India and 2 CHAPTER 8 SECTION 1: COMPARING ECONOMIES ACROSS TIME AND SPACE Figure 8-1 Log r eal GDP pe r capita Yea r 1910 1900 1920 1930 1940 1950 1960 1970 1980 1990 2000 2003 32,000 16,000 8,000 4,000 2,000 1,000 500 World War II China India U.S. The Growth of Real GDP per Capita Over the past century, U.S. real GDP per capita rose by nearly 600%, representing an average annual growth rate of real GDP per capita of 1. 9 % since 1 9 00. Despite recent increases in growth, China and India are still poorer than the United States was in 1 9 00. Source: 1 9 00–2001 data: Angus Maddison, The World Economy: Historical Statistics (Paris: OECD, 2003); 2002–2003 data: World Bank.
China in a moment.) The vertical axis is drawn in a proportional scale so that equal per- centage changes in real GDP per capita across countries are the same size in the graph. To give a sense of how much the U.S. economy has grown, Table 8-1 shows real GDP per capita at 20-year intervals, expressed two ways: as a percentage of the 1900 level and as a percentage of the 2000 level. By 1920, the U.S. economy already pro- duced 136% as much per person as it did in 1900. By 2000, it produced 688% as

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KW_Macro_Ch_08_Sec_01_Comparing_Economies_Across_Time_and_Space

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