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Unformatted text preview: 1 Economics 102 Lecture 5 : Production and Growth LECTURE 5 PRODUCTION AND GROWTH 1 Production and Growth For most of human history, there has been no sustained increase in output per worker. Why? Sustained economic growth began in England in the early 19 th century. Growth has since spread to many other countries. What explains this? Why are some countries rich while others are poor? LECTURE 5 PRODUCTION AND GROWTH 2 A long view of economic growth What explains the sudden change in the 19 th century? 2 LECTURE 5 PRODUCTION AND GROWTH 3 Sweden and Argentina: What explains the difference in longrun economic growth? LECTURE 5 PRODUCTION AND GROWTH 4 What explains GDPpercapita levels of matched pairs of countries? LECTURE 5 PRODUCTION AND GROWTH 5 In this lecture, look for answers to these questions: What are the facts about living standards and growth rates around the world? Why does productivity matter for living standards? What determines productivity and its growth rate? 3 LECTURE 5 PRODUCTION AND GROWTH 6 The Basics of Economic Growth Economic growth is the sustained expansion of production possibilities measured as the increase in real GDP over a given period. Calculating Growth Rates The economic growth rate is the annual percentage change of real GDP. The economic growth rate tells us how rapidly the total economy is expanding. LECTURE 5 PRODUCTION AND GROWTH 7 The Basics of Economic Growth The standard of living depends on real GDP per person. Real GDP per person is real GDP divided by the population. Real GDP per person grows only if real GDP grows faster than the population grows. LECTURE 5 PRODUCTION AND GROWTH 8 Why Small Differences in Growth Rates Matter Compound Interest Suppose: In 1800 $10 deposited @ 4% interest In 2007 the account is worth $33,566.13 $10 x (1.04) 207 = $33,566.13 Why does the original $10 grow so much? The payment of interest is not only on the original deposit but on all previously accumulated interest 4 LECTURE 5 PRODUCTION AND GROWTH 9 Why Small Differences in Growth Rates Matter Interest rate (%) Value of $10 after 207 years 2 $602.89 4 $33,566.13 6 $1,731,067.93 Observations A small sum compounded over long periods can greatly increase in value Small differences in the interest rate have a very large impact on value LECTURE 5 PRODUCTION AND GROWTH 10 Why Small Differences in Growth Rates Matter Compound Interest Economic growth rates are similar to compound interest rates....
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.
 Fall '08
 Rossana
 Economics

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