EconomicGrowth

# EconomicGrowth - Ch. 8 Economic Growth I. Overview What...

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1 Ch. 8 Economic Growth I. Overview What causes growth? China now 5x GDP of Uganda. Avg. annual: China 12%, Uganda: 4.7% Ask why these two countries had such different growth Year China Uganda 1980 416 499 1990 1,313 763 2000 3,913 1,245 2007 8,788 1,728 GDP per Capita, Purchasing Power Parity, in dollars

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2 II. The Basics of Economic Growth Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP over a given period A. The magic of sustained growth Recall that growth is geometric. This means that small differences in average annual growth rates lead to large differences in GDP per capita. Suppose country A and country B start with the same per capita GDP, say \$1,000. Suppose that over the next 50 years, Country A has 2% growth and country B has 3% growth. At the end of the 50 years: A: \$1,000(1+.02)^50= \$2,692 Country A: 1,000 (1.02)^50 = \$2,692 Country B: 1,000 (1.03)^50 = \$4,384
3 B. A very useful formula is the “Rule of 70”: The number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable. Suppose the GDP per capita of a country grows at 1% per year on average. Then GDP per capita will double in: 70/%1 = 70 years to double Suppose another country has 5% average annual growth. Then its GDP per capita will double in: 70/5 = 14 years 70/1 = 70 years. 70/5 = 14 years.

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4 III. Economic Growth Trends A. Growth in the U.S. Economy This shows the geometric nature of growth. It is useful to take logs (which is what Parkin does.) 0 10 20 30 40 50 Real GDP per capita 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year Real GDP per capita, in thousands of 2007 dollars
5 Exponential growth: Y(t) = Y(0) exp(gt). Ln(y(t)) = ln(y(0) + g x t. So slope of line is the growth rate. 1889 – 1929: 1.7% per year 1947-2007: 2.1% per year 1.5 2 2.5 3 3.5 4 ly 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 year Natural Log of Real GDP per capita

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B. Convergence: Do countries that start out poorer catch up to the richer countries? Japan was catching up to US, until it stagnated in the 1990s.
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## This note was uploaded on 04/07/2008 for the course GENERAL ED MMW 1,2; E taught by Professor Vandehey during the Spring '08 term at UCSD.

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EconomicGrowth - Ch. 8 Economic Growth I. Overview What...

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