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##### The Long Run

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**Part 2:**The Long Run**Chapter 3**An Overview of Long-Run Economic Growth Charles I. Jones**3.1 Introduction**• In this chapter, we learn: • some facts related to economic growth that later chapters will seek to explain. • how economic growth has dramatically improved welfare around the world. • this growth is actually a relatively recent phenomenon.**3.1 Introduction**• In this chapter, we learn: • some tools used to study economic growth, including how to calculate growth rates • why a “ratio scale” makes plots of per capita GDP easier to understand.**The United States of a century ago could be mistaken for**Kenya or Bangladesh today. Some countries have seen rapid economic growth and improvements to health quality, but many others have not.**3.2 Growth over the Very Long Run**• Sustained increases in standards of living are a recent phenomenon. • Sustained economic growth emerges in different places at different times. • Thus, per capita GDP differs remarkably around the world.**The Great Divergence**The recent era of increased difference in standards of living across countries. Before 1700 Per capita GPD in nations differed only by a factor of two or three Today Per capita GPD in differs by a factor of 50 for several countries.**3.3 Modern Economic Growth**• Timeline: From 1870 to 2000, United States per capita GDP… • rose by nearly 15-fold • Implications for you? • A typical college student today will earn a lifetime income about twice his or her parents.**The Definition of Economic Growth**• Growth of per capita GDP • The exact rate of change of per capital GDP. • A percentage change • The change between two periods divided by the value of the variable in the initial period. • Percentage change in GDP between period t and and t + 1 “new” GPD “old” GPD**Percentage change between period t and and t + 1**Finding the growth rate between that same period Growth Rate**A Population Growth Example**• Population (L below) also works this way. • Intuitively, tomorrow’s population in time period t + 1 depends on today’s population in period t**The constant growth rule:**Initial variable value in period 0 Variable value in period t Constant Growth Rate Time Period**The Rule of 70 and the Ratio Scale**• The Rule of 70 • If y grows at a rate of g percent per year, then the number of years it takes y to double is approximately equal to 70/g. • Notes • Small differences in growth rates result in large differences over time. • The time it takes to double only depends on the growth rate and not the initial value.**A ratio scale**Plot where equally spaced tick marks on the vertical axis are labeled consecutively with numbers that exhibit a constant ratio When plotted on a ratio scale, a variable that grows at a constant rate will be a straight line.**U.S. GDP on a Ratio Scale**• If a variable is growing at a constant rate it will be a straight line on a ratio scale • If growth rates are rising, the slope will be increasing.**U.S. GDP on a Ratio Scale**• Per capita GDP in the United States has grown at approximately 2 percent per year over the last 130 years. • Easy to see with a ratio scale • Approximately linear**Calculating Growth Rates**• The rule for computing growth rates • This formula can be applied even if the data does not exhibit constant growth. Solve for growth rate**3.4 Modern Growth around the World**• After World War II, growth in Germany and Japan accelerated. • Convergence • Poorer countries will grow faster to “catch up” to the level of income in richer countries. • Brazil had accelerated growth until 1980 and then stagnated • China and India have had the reverse pattern.**A Broad Sample of Countries**• Over the period 1960 – 2007 • Some countries have exhibited a negative growth rate • Other countries have sustained nearly 6 percent growth • Most countries have sustained about 2 percent growth. • Small differences in growth rates result in large differences in standards of living.**Case Study: People versus Countries**• Since 1960: • The bulk of the world’s population is substantially richer • The fraction of people living in poverty has fallen • A major reason for changes • Economic growth in China and India • 40 percent of the world population!**3.5 Some Useful Properties of Growth Rates**• Growth rates of ratios, products, and powers follow several simple rules. • Growth rates obey mathematical operations that are a level simpler than the operation on the original variable. • Variables Divided Growth Rates subtracted • Variables Multiplied Growth Rates added • Variable taken to a Power number Growth rate multiplied by that number**Suppose two variables x and y have average annual growth**rates of gx and gy, respectively. Assume also that gz is the average annual growth rate of z Then the following rules apply:**Case Study: Growth Rules in a Famous Example, Yt=**AtKt1/3Lt2/3 • Applying rules of growth rates • Original output equation: • Use multiplication rule to get • Use exponent rule to get**3.6 The Costs of Economic Growth**• The benefits of economic growth • Improvements in health • Higher incomes • Increase in the variety of goods and services**Costs of economic growth include**• Environmental problems • Income inequality across and within countries • Loss of certain types of jobs • Economists generally have a consensus that the benefits of economic growth outweigh the costs.**3.7 A Long-Run Roadmap**• Are there certain policies that will allow a country to grow faster? • If not, what about a country’s “nature” makes it grow at a slower rate?**Summary**• Sustained growth in standards of living is a very recent phenomenon. • If the 130,000 years of human history were warped and collapsed into a single year, modern economic growth would have begun only at sunrise on the last day of the year.**Summary**• Modern economic growth has taken hold in different places at different times. • Since several hundred years ago, when standards of living across countries varied by no more than a factor of 2 or 3, there has been a “Great Divergence.” • Standards of living across countries today vary by more than a factor of 60.**Since 1870**growth in per capita GDP has averaged about 2 percent per year in the United States. per capita GDP has risen from about $2,500 to more than $37,000 Growth rates throughout the world since 1960 show substantial variation Negative growth in many poor countries Rates as high as 6 percent per year in several newly industrializing countries, most of which are in Asia.**Growth rates typically change over time.**In Germany and Japan Growth picked up considerably after World War II Incomes converged to levels in the United Kingdom. Growth rates have slowed down as this convergence occurred.**Brazil exhibited rapid growth in the 1950s and 1960s and**slow growth in the 1980s and 1990s. China showed the opposite pattern.**Economic growth, especially in India and China, has**dramatically reduced poverty in the world. In 1960 2 out of 3 people in the world lived on less than $5 per day (in today’s prices). By 2000 this number had fallen to only 1 in 10.**This concludes the Lecture**Slide Set for Chapter 3 Macroeconomics Second Edition by Charles I. Jones W. W. Norton & Company Independent Publishers Since 1923