Chapter 9 - chapter 9 > LongRunEconomic Growth 1 of 52 WHAT...

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1 of 52 chapter: 9 >> Long-Run Economic  Growth
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2 of 52 WHAT YOU WILL LEARN IN THIS CHAPTER How long-run growth can be measured by the increase in real GDP per capita, how this measure has changed over time, and how it varies across countries Why productivity is the key to long-run growth, and how productivity is driven by physical capital, human capital, and technological progress The factors that explain why growth rates differ so much among countries
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3 of 52 WHAT YOU WILL LEARN IN THIS CHAPTER How growth has varied among several important regions of the world and why the convergence hypothesis applies to economically advanced countries The question of sustainability and the challenges to growth posed by scarcity of natural resources and environmental degradation
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4 of 52 Comparing Economies Across Time and Space Real GDP per capita (log scale) $100,000 10,000 1,000 1907 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007 Year
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5 of 52 Real GDP per Capita Year Percentage of 1907 real GDP per capita Percentage of 2007 real GDP per capita 1907 100% 16% 1927 129 21 1947 175 28 1967 283 46 1987 430 69 2007 620 100
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6 of 52 Income Around the World, 2007
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7 of 52 PITFALLS Change in levels versus rate of change When studying economic growth, it’s vitally important to understand the difference between a change in level and a rate of change. When we say that real GDP “grew,” we mean that the level of real GDP increased. We might say that U.S. real GDP grew during 2007 by $229 billion. If U.S. real GDP in 2006 was $11,295 billion, then U.S. real GDP in 2007 was $11,295 billion + $229 billion = $11,524 billion. We could calculate the rate of change, or the growth rate, of U.S. real GDP during 2007 as: (($11,524 billion − $11,295 billion)/$11,295 billion) × 100 = ($229 billion/$11,295 billion) × 100 = 2.03%.
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8 of 52 Growth Rates How did the United States manage to produce over six times more per person in 2007 than in 1907? A little bit at a time. Long-run economic growth is normally a gradual process, in which real GDP per capita grows at most a few percent per year. From 1907 to 2007, real GDP per capita in the United States increased an average of 1.8% each year.
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9 of 52 Growth Rates The Rule of 70 tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate.
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10 of 52 Growth Rates United States 10% 8 6 4 2 0 -2 Average annual growth rate of real GDP per capita, 1980-2007 Ireland Argentina France 4.1% 2.0% 1.5% 0.8% -1.4% 8.7% China India Zimbabwe 4.1%
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11 of 52 ►ECONOMICS IN ACTION India Takes Off India achieved independence from Great Britain in 1947, becoming the world’s most populous democracy—a status it has maintained to this day. Despite ambitious economic development plans, India’s performance was consistently sluggish. In 1980, India’s real GDP per capita was only about 50% higher than it had been in 1947. Real GDP per capita has grown at an average rate of 4.1% a year, tripling between 1980 and 2007.
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