9 LONG-RUN ECONOMIC GROWTH
WHAT YOU WILL LEARN IN THIS CHAPTER • Why is long-run economic growth measured as the increase in real GDP per capita? How has real GDP per capita changed over time in different countries? • Why is productivity the key to long-run economic growth? How is productivity driven by physical capital, human capital, and technological progress? • Why do long-run growth rates differ so much among countries? • How does growth vary among several important regions of the world? Why does the convergence hypothesis apply to economically advanced countries? • How does scarcity of natural resources and environmental degradation pose a challenge to sustainable long-run economic growth?
GROWTH HAS BENEFITS AND COSTS • Chinese growth (and air pollution) have risen dramatically.
COMPARING ECONOMIES ACROSS TIME AND SPACE
CANADIAN REAL GDP PER CAPITA • The Canadian economy produces almost 133% as much per person as in 1900. TABLE 9-1 Canadian Real GDP per Capita Year Percentage of 1900 real GDP per capita Percentage of 2015 real GDP per capita 1900 100% 11% 1920 133 15 1940 184 20 1980 555 61 2000 772 85 2015 905 100 Data from: Angus Maddison, Statistics on World Population, GDP, and Per Capita GDP, 1–2008AD, “The First Update of the Madison Project: Reestimating Growth Before 1820” ; The World Bank.
INCOMES AROUND THE WORLD, 2015 • Large parts of the world have very low incomes. Generally speaking, the countries of Europe and North America, as well as a few in the Pacific, have high incomes. • Many Asian countries, including China and India, have experienced rapid economic growth, moving them into the middle income groups. • Africa, however, is dominated by countries with GDP less than US$5,000 per capita.
THE RULE OF 70: THE MAGIC OF COMPOUNDING • Even small differences in growth rates get magnified over time. • The rule of 70: • Example: If real GDP per capita is growing at an annual growth rate of 3.5%, it will double in: 70/3.5 = 20 years • The moral? Small improvements in growth add up fast (the power of compounding). X of rate growth Annual 70 X for time Doubling
Check Your Understanding Suppose that real GDP per capita grows at 2% per year. How many years will it take for real GDP per capita to approximately double? It will take: a) 70 years because of the rule of 70. b) 140 years, because the rule of 70 states that a variable will double in 70 years if the variable has an annual growth rate of 1%; therefore, a variable growing at 2% will take twice as long to double. c) 35 years, because 70/2 = 35. d) 50 years, since at 2% per year it takes 50 years to reach 100% more than the initial real GDP per capita.
THE SOURCES OF LONG-RUN GROWTH • Sustained economic growth occurs mainly due to increases in worker/ labor productivity. • Productivity or Labor productivity (often referred to simply as productivity): It is defined as output per worker or output per man hour • Man Hour: The number of hours worked by an average worker • Growth in Productivity is influenced by – Quantity of Physical Capital – Human capital – Technological Progress
EXPLAINING GROWTH IN PRODUCTIVITY: PART 1 •