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EC102-7SPRING09b - Chapter 7 1Economic Growth 71 Economic...

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7-1 Chapter 7:  1Economic Growth Economic Growth  http://en.wikipedia.org/wiki/Human_Development_Index o Refers to growth of one of three interrelated macroeconomic  variables: o Aggregate output/income (GDP) o GDP per capita o Productivity See:   www.csls.ca
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7-2 o On-line Availability of the Spring 2008 Issue of the  International Productivity Monitor
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7-3 The Rule of 70 70 g The 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 double Example: if a country grows at 4% per year, how many years will it takes  for that country’s growth (as measure by real GDP) to double? 70/4 Note: treat “g” as a whole number
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7-4 The Arithmetic of Compound Growth Suppose that deposit $100 in a bank account which pays 5%  per year (annum) and you let the interest compound ( earn  interest on interest) Year Closing Bank Balance 1 $100 + (0.05 * $100) = $105 2 $105 + (0.05 * $105) = $110.25 3 $110.25 + (0.05 * $110.25) = $115.76 4 $115.76 + (0.05 * $115.76) = $121.55 14 $188.57 + (0.05 * $188.57) = $197.99
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7-5 Formula for Compound Growth Initial level * (1 + g)^n g – growth rate, n – number of years = Level at the end of n years So, from the previous example if g = 5% and n = 14 Calculate the value of $100 in 14 years using the above formula
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7-6 Calculation of a Growth Rate (g) o Let  to denote the annual growth rate g = level at the end of n years ^ 1/n - 1 initial level If GDP is 125 billion at the end of 25 years and 75 billion initially, calculate the growth rate, g 2.06%
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