ECO 1002 Ch 10

Real GDP per Capita Growth Rate

  • Combining real GDP with population = real GDP per capita

  • Measures change in purchasing power over time.

  • Formula:
    Real GDP per capita growth rate = Nominal GDP growth rate - Inflation rate - Population growth rate

Compounding Economic Growth

  • Economic growth builds over time, similar to compound interest.

  • Example of GDP growth from $100 at 10% annually until 2025.

  • U.S. average annual growth in real GDP per capita: 2% over the last century.

Forecasting GDP Using Compounding

  • Formula for estimating future GDP per capita:
    GDP Yr A = GDP Yr B x (1+Growth rate) ^(Yr A - Yr B)

  • Example calculations for France and Spain from 2013 to 2015 with respective growth rates.

Rule of 70

  • Years until income doubles=70real GDP growth rateYears\, until\, income\, doubles = \frac{70}{real\, GDP\, growth\, rate}

  • Estimates doubling time for incomes in different countries using their growth rates.

Productivity

  • Productivity drives growth and is defined as output per worker.

  • Increases in productivity lead to higher per capita income = economic growth, as workers become more efficient and can produce more goods and services within the same amount of time.

Components of Productivity

  1. Physical capital (K): Equipment and structures for production.

  2. Human capital: Skills, knowledge, and experience of workers.

  3. Natural resources: Earth-derived production inputs.

  4. Technological improvements (A): Innovations increasing output from the same inputs.

Rates Versus Levels

  • Analogy of speed in a car illustrates differences between countries with varying economic growth rates and levels.

Accounting for Growth

  • Equation to decompose growth:
    gy = ga +agk+ (1-a)gL

g represents growth rate; a and 1-a signify GDP shares for capital owners and workers.

  • Example with China's growth rates.

Convergence Theory

  • Poor countries grow faster than rich ones, leading to convergence in growth rates.

  • Evidence supports the theory with recent economic trends.

Growth and Public Policy

  • Public policies to promote growth include investment in capital, education, and healthcare.

  • Trade-offs necessary; poorer countries face greater challenges.

Investment and Savings

  • Domestic and foreign savings contribute to physical capital investment.

  • Varying saving rates between developed and developing nations.

  • Domestics savings = domestic income - consumption spending

Foreign direct investment (FDI) involves a firm operating or investing abroad. Governments attract FDI to supplement domestic savings and potentially gain human capital transfer, though firms may demand tax breaks, and transfers are not always guaranteed.

An investment trade-off involves reducing current consumption for capital investment to boost future production.

Governance's Role in Growth

  • Effective government services and laws are essential for a functioning economy.

  • Stability in leadership and property rights enforcement are crucial.

Summary Points

  1. Compounding growth looks modest but leads to significant increases over time.

  2. Productivity increases are vital for higher living standards.

  3. Convergence theory supports faster growth in lower-income countries until parity is achieved.

  4. Investment trade-offs influence future production capabilities and require sound policy and governance.