Chapter 9: Long-Run Economic Growth

Economic Growth

Increase in Real GDP or Real GDP per capita.

Real GDP per capita

Measures the average economic output per person, adjusted for inflation.

Productivity

Output per worker.

Physical Capital

Tools, buildings, and machines that contribute to productivity.

Human Capital

Education and skills that enhance worker productivity.

Technology

Innovative production methods that improve output.

Aggregate Production Function

Shows how productivity depends on physical capital, human capital, and technology.

Diminishing Returns to Capital

Adding more physical capital yields smaller increases in productivity.

Convergence Hypothesis

Poorer countries grow faster than richer ones and catch up over time.

Savings and Investment Spending

Positive contributor to economic growth by providing funds for capital.

Education

Investing in human capital to improve economic growth.

Research & Development (R&D)

Innovations that drive productivity and economic growth.

Government Policies

Strategies that foster economic growth through infrastructure, education, and stability.

Barriers to Growth

Challenges that inhibit economic progress, such as corruption or unstable politics.

Natural Resources

Less important today compared to human and physical capital for economic growth.

Financial Sector’s Role

Connects savers with borrowers, enabling investments necessary for productivity growth.

Rule of 70

A method to estimate the doubling time of an investment based on its growth rate.

Lower Interest Rates

Lead to cheaper borrowing but may signal economic anxiety and falling demand for loans.

Two parts of financial sectors

• Two parts:

  • Markets (stocks, bonds)

  • Institutions (banks, credit unions)