# ec-3 - Chapter 10: Long-Run Economic GrowthSources and...

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Chapter 10: Long-Run Economic Growth—Sources and Policies In this chapter you should be able to : Define economic growth, calculate economic growth rates, and describe trends in economic growth. Use the economic growth model to explain why growth rates differ across countries. Discuss fluctuations in productivity growth in the United States. Explain economic catch-up (convergence) Discuss government policies that foster economic growth. What we use to measure economic growth and growth trends We are interested in percentage changes in “potential” real GDP per capita Total percentage change Average Annual percentage change Instead of real GDP per capita Let’s look at real GDP at the end of 1929 and 2007. In 2000 billion dollars, RGDP 2007 = E = 11,675.7 Billion RGDP 1929 =B = 865.2 Billion What is the Total percentage change and what is the average annual percentage change? For the total percentage change we just need to look at the two points and calculate the percent change. 1249.48% = 100(11,675.5 – 865.2) 865.2 For the average annual we can calculate it directly by finding the constant annual growth rate, g, required to reach our end amount. If we have a beginning amount, “B”, and it grows by a rate “g” for “n” periods then the end amount, “E” is found by using our growth formula, B(1 + g) n = E Let’s re-arrange this formula to find g, (1 + g) n = E/B 1 + g = (E/B) 1/n g = (E/B) 1/n – 1 1

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Put g in percentage form g% = [(E/B) 1/n – 1] *100 So let So in 2000 dollars let RGDP 2007 = E = 11,675.7 Billion RGDP 1929 =B = 865.2 Billion n = 79, then g% = 3.4% Economic Growth over Time World economic growth in terms of Real GDP per person was basically zero until about 1300 A.D. Sure there were great accomplishments but the average person did not see any real change in their living standards for most of history. World growth rates from 1300 A.D. 1300—1800: 0.2% 1800—1900: 1.3% 1900—2000: 2.3% But these rates were not even across the world. Dramatic growth rate change hit England after its “Industrial Revolution” first. 2
Why such a difference across the world? Think of the various institutions that establish property rights and enable markets for voluntary exchange in the various countries of the world. Let’s look at a growth model to help us think of the process of increasing real GDP per person. An Economic growth model is a model that explains changes in real GDP per capita in the long run. It focuses on the causes of long-run increases in labor productivity, the quantity of goods and services that can be produced by one worker or by one hour of work. Two key factors determine labor productivity: The quantity and quality of capital per hour worked. The level of technology.

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## This note was uploaded on 04/19/2011 for the course ECON 200 taught by Professor Staff during the Winter '09 term at Indiana.

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ec-3 - Chapter 10: Long-Run Economic GrowthSources and...

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