BOOK NOTES - Econ Exam 2 Book Notes 17/11/2011 19:53:00...

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Econ Exam 2 Book Notes 17/11/2011 19:53:00 Chapter 7: Economic Growth The Remarkable Rise in Living Standards: The Record o Real GDP per person= provides a measure of the quantity of goods  and services available to the typical resident of a country at a particular  time Lacking better alternative, economists have focused on real  GDP per person as a key measure of a country’s living standard  and stage of economic development Despite difficulty of making precise comparisons (because of  less precise historical GDP estimates the farther back you go)  we can say with certainty that the variety, quality, and quantity  of goods and services increased enormously in industrialized  countries during the nineteenth and twentieth centuries Why “Small” Differences in Growth Rates Matter o The fact that what seem to be small differences in growth rates can  have large long-run effects results from what is called the power of  compounding, which is often illustrated by compound interest o Compound interest= the payment of interest not only on the original  deposit but on all previously accumulated interest Distinguished from simple interest, in which interest is paid only  on the original deposit Ex: great great grandpa deposited $10.00 in checking account  in 1800 at 4 percent interest. Interest is compounded annually- if  withdrew funds in 2005 you would have $10.00 x (1.04) 205  =  $31,033.77 --- hence the phrase “the power of compound  interest” The power of compound interest is that even at relatively low  rates of interest, a small sum, compounded over a long enough  period, can greatly increase in value. The difference b/w a 2  percent and a 4 percent interest rate doesn’t seem tremendous,  but over a long period of time it implies large differences in the  amount of interest accumulated on an account
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o Economic growth rates are similar to compound interest rates. Just as  the value of a bank deposit grows each year at a rate equal to the  interest rate, so the size of a nation’s economy expands each year at  the rate of economic growth. Relatively small differences in growth rate, as in case of Brazil  and Ghana, will ultimately produce very different living  standards. Over the long run, rate of economic growth is very  important variable- hence, government policy changes or other  factors that affect the long-term growth rate even by a small  amount will have a major economic impact Why Nations become Rich: the crucial role of average labor productivity o Average labor productivity= output per employed worker
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This note was uploaded on 02/06/2012 for the course ECON 1015 taught by Professor Myounglee during the Spring '08 term at Missouri (Mizzou).

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BOOK NOTES - Econ Exam 2 Book Notes 17/11/2011 19:53:00...

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