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What is economic growth?

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What is economic growth?

What is economic growth?

For most of human history, life was, as philosopher Thomas Hobbes said, “nasty, brutish and short.”

What is economic growth?

Before 1750, the norm was chronic hunger, malnutrition, and disease.

Even the wealthy had poor diets. Life expectancy was age 30.

An average British man in 1750 grew to a height of 5’6 and weighed just 130 pounds.

What is economic growth?

No one had ovens, dishwashers, microwaves, or sinks. They didn’t even have indoor kitchens.

No electricity. No heat or air conditioning. No lights. No plumbing. No phones. No computers.

What is economic growth?

Economic growth is what changed that. In the past 250 years, people ate more and better, grew bigger, worked fewer hours, and lived in greater safety and comfort.

What is economic growth?

How did this happen?

Technology

What is economic growth?

How did this happen?

Technology

Specialization of labor

What is economic growth?

How did this happen?

Technology

Specialization of labor

Human capital

What is economic growth?

All of these led to greater productivity – in other words, we could make more with the same resources.

What is economic growth?

Think of just the 20th Century…

Airplane

Penicillin

DNA

Computers

Nuclear energy

Cell phones

Internet

What is economic growth?

Which one do we mean when we talk about growth?

Increases in nominal GDP

Increases in real GDP

Increases in real per capita GDP

What is economic growth?

We can illustrate economic growth:

Production possibilities curve

AD/AS Model

Business Cycle

New resources move the PPF outward, meaning the economy can have more of both goods.

Capital goods

Consumer goods

AS1

AS2

Increases in AS and AD cause GDP to go up without inflation.

Price

Level

AD1

AD2

Real GDP

peak

Long-

term

upward

trend

is

growth

expansion

peak

recovery

contraction

trough

The Rule of 72 lets you calculate the time it takes for something to double.

It can be an investment or the GDP.

If the growth rate is x%,

Then 72/x is the time it takes to double.

If you have $500 in the bank earning 3% interest, how long until you have $1,000?

If you have $500 in the bank earning 3% interest, how long until you have $1,000?

72/3 = 24

It will take 24 years

If you have $100 in the bank earning 10% interest, how long until you have $200?

If you have $100 in the bank earning 10% interest, how long until you have $200?

72/10 = 7.2

7.2 years

If an economy is growing at a rate of 1%, how long until GDP doubles?

If an economy is growing at a rate of 1%, how long until GDP doubles?

72 years

If an economy is growing at a rate of 2%, how long until GDP doubles?

If an economy is growing at a rate of 2%, how long until GDP doubles?

36 years

You can see the importance of having a higher growth rate.

In one year, the difference may seem minimal.

Over time, it is huge.

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