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Unformatted text preview: 71Chapter 7: 1Economic GrowthEconomic Growth http://en.wikipedia.org/wiki/Human_Development_IndexoRefers to growth of one of three interrelated macroeconomic variables:oAggregate output/income (GDP)oGDP per capitaoProductivitySee: www.csls.ca72oOnline Availability of the Spring 2008 Issue of the International Productivity Monitor73The Rule of 7070gThe rule of 70 indicates that if you divide a growth rate g into the number 70, this will tell you the number of years required for the variable to doubleExample: if a country grows at 4% per year, how many years will it takes for that countrys growth (as measure by real GDP) to double?70/4Note: treat g as a whole number74The Arithmetic of Compound GrowthSuppose that deposit $100 in a bank account which pays 5% per year (annum) and you let the interest compound ( earn interest on interest)YearClosing Bank Balance1$100 + (0.05 * $100) = $1052$105 + (0.05 * $105) = $110.253$110.25 + (0.05 * $110.25) = $115.764$115.76 + (0.05 * $115.76) = $121.5514$188.57 + (0.05 * $188.57) = $197.9975Formula for Compound GrowthInitial level*(1 + g)^n g growth rate, n number of years=Level at the end of n yearsSo, from the previous example if g = 5% and n = 14Calculate the value of $100 in 14 years using the above formula76Calculation of a Growth Rate (g)oLet g to denote the annual growth rateg =level at the end of n years^ 1/n  1initial levelIf GDP is 125 billion at the end of 25 years and 75 billion initially, calculate the growth rate, g2.06%77...
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 Spring '10
 Mr.Lushman

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