Chap_9_-_Growth[1]

Chap_9_-_Growth[1] - Long Run Economic Growth In 1900, in...

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K. Kramer © 2009 Long Run Economic Growth In 1900, in the United States, it would take almost 2 days to do the laundry for the week. Most people did not have electricity or indoor pluming. And telephones and cars were very rare. Today, almost everyone in the US has access to these amenities, even those in the poorest, most rural counties. This is a huge increase in the standard of living from 1900 until today, and it is largely due to economic growth. At the same time, most people in Africa have living standards that don’t even come close to the living standards that existed in the United States 100 years ago. And things have been getting worse. In America, rGDP per capita was 11% lower in 2003 than it was in 1974. The result of this negative growth has been a worsening of poverty. In 1970 42% of African lived on $1 a day in today’s prices. In 2001, that number had increased to 46%. Increased standards of living go had in hand with growth. Poverty often results from sluggish or negative growth, while steady growth can often create huge amounts of wealth for society. It’s for this reason that many economist think that the study how and why countries grow is much more important than figuring out business cycles. Recessions grab headlines, but long run growth has a much larger effect. To see this, imagine two countries, Big and Little. In Big, after years of steady long run growth, the rGDP per capita is $10,000. In Little, after years of stagnation, the rGDP per capita is $1,000. Now imagine that in the short term, Big undergoes an extremely serious recession and it’s economy shrinks by 10%. At the same time, Little’s economy goes through a huge expansionary period and grows by 10%. Then Big’s rGDP per capita would shrink to $9,000, while Little’s GDP per capita would increase to $1,100. But this would mean that Big’s rGDP per capita would still be over 8 times higher than little’s rGDP per capita. And unlike long term growth, recessions and expansions tend to end with time. So both countries would tend to go back to their original baseline. Measuring the standard of living : If you remember from my lecture on GDP the most common way that economists measure the standard of living is with Real GDP per capita. RGDP per capita is defined as: RGDP percapita = RGDP population Using rGDP per capita, we can measure how much the standard of living in a country has increased in a given period of time. As we can see from Table 1, in 1900 in the United Table 1: U.S. Real GDP per Capita Year rGDP per capita (2002$) % of 1990 rGDP per capita % of 2000 rGDP per capita 1900 $5,219 100% 14.5% 1920 7,083 136 19.7 1940 8,943 171 24.9 1960 14,452 277 40.3 1980 23,700 454 66.0 2000 35,887 688 100
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K. Kramer © 2009 2 States, the rGDP per capita (2002$) was $5,219, while the rGDP per capita in 2000 was $35,887. That is almost 7 times what it was in 1900. Another way of saying that is that rGDP per capita in 1900 was only 14.5% of what of what it was in 2000.
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Chap_9_-_Growth[1] - Long Run Economic Growth In 1900, in...

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