ECO2013 Fall 2003 Cobbe Chapter 10
Page 1 of 11
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When you have completed your study of this
chapter, you will be able to
C H A P T E R
C H E C K L I S T
Define and calculate the economic growth rate, and explain the
implications of sustained growth.
1
Identify the main sources of economic growth.
Review some theories of economic growth that try to explain
why growth rates vary over time and across countries.
2
3
Describe some policies that might speed economic growth.
4
10.1 THE BASICS OF ECONOMIC GROWTH
Economic growth is a sustained expansion of
production possibilities measured as the increase in real
GDP produced over a given period.
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Calculating Growth Rates
Economic growth rate
The rate of change of real GDP expressed as a
percentage per year.
10.1 THE BASICS OF ECONOMIC GROWTH
To calculate this growth rate, we use the formula:
Growth of
real GDP =
Real GDP in
current year
Real GDP in previous year
x 100
Real GDP in
previous year
–
For example, if real GDP in the current year is $8.4
trillion and if real GDP in the previous year was $8.0
trillion, then the growth rate of real GDP is :
Growth of
real GDP =
$8.4 trillion – $8.0 trillion
$8.0 trillion
x 100 = 5 percent.
10.1 THE BASICS OF ECONOMIC GROWTH
The standard of living ultimately depends on real GDP
per person.
Real GDP per person
Real GDP divided by the population.
Any
individual
’s standard of living depends on the
distribution
of GDP as well as average real GDP per
person, but the
average
standard of living can be
measured by real GDP per person, i.e. real GDP
divided by the population.
10.1 THE BASICS OF ECONOMIC GROWTH
For example, to calculate this growth rate, of GDP per
person, we use the same formula as before, replacing real
GDP with real GDP per person.
Suppose, for example, that in the current year, when real
GDP is $8.4 trillion, the population is 202 million.
Then real GDP per person is $8.4 trillion divided by 202
million, which equals $41,584.
And suppose that in the previous year, when real GDP
was $8.0 trillion, the population was 200 million.
Then real GDP per person in that year was $8.0 trillion
divided by 200 million, which equals $40,000.
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10.1 THE BASICS OF ECONOMIC GROWTH
Use these two values of real GDP per person in the
growth formula to calculate the growth rate of real GDP
per person. It is:
Growth rate of real
GDP per person
$41,584 – $40,000
$40,000
x 100 = 4 percent.
=
10.1 THE BASICS OF ECONOMIC GROWTH
The growth rate of real GDP per person can also be
calculated by using the approximation, very accurate for
growth rates less than about 10% per year,
Growth of real
GDP per person
Growth rate of
real GDP
Growth rate of
population
–
=
Growth of
population
202 million – 200 million
200 million
x 100 = 1 percent.
=
10.1 THE BASICS OF ECONOMIC GROWTH
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 Spring '05
 Denslow
 Economics, Capital accumulation, Neoclassical growth theory

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