In-Depth Notes on Long-Run Economic Growth and Productivity

What You Will Learn in This Chapter

  • Long-run Economic Growth:
    • Measured as the increase in real GDP per capita.
    • Historical changes in real GDP per capita across countries.
  • Productivity's Role in Growth:
    • Key driver of long-run economic growth.
    • Influenced by physical capital, human capital, and technological progress.
  • International Growth Rates:
    • Variability in long-run growth rates among countries.
    • Growth disparities in different world regions.
    • Convergence hypothesis: Observes economic behaviors in advanced countries.
  • Sustainability Challenges:
    • Challenges posed by natural resource scarcity and environmental degradation on sustainable economic growth.

Growth Has Benefits and Costs

  • Case Study:
    • China: Economic growth has surged but so has air pollution.

Comparing Economies Across Time and Space

  • Real GDP Per Capita (1990 dollars, log scale):
    • Historical data showcasing growth trends from 1900 to 2015 in various countries (e.g., USA, China, India).

Learn by Doing: Practice Question 1

  • Macronesia GDP Example:
    • Real GDP = $200 million (2010), Population = 100,000.
    • If population increases to 105,000 and GDP rises by 5%, GDP per capita in 2011:
    • Correct answer: Stayed constant.

U.S. Real GDP Per Capita

  • Growth Overview:
    • U.S. economy produces ~8 times more per person than in 1900.
    • Data shows growth in GDP per capita over the years from 1900 to 2015.

The Rule of 70: The Magic of Compounding

  • Understanding Compounding:
    • Small growth rate differences can compound significantly.
    • Example: At 3.5% growth, GDP per capita doubles in 20 years (70/3.5).

Learn by Doing: Practice Question 2

  • Doubling Time Calculation:
    • With 2% annual growth, it takes ~35 years to double real GDP per capita (70/2).

Sources of Long-Run Growth

  • Productivity Growth Factors:
    • Physical Capital:
    • Man-made resources (buildings, machines) boost output.
    • Human Capital:
    • Education and skills of the workforce improving productivity.
    • Technological Progress:
    • Innovations leading to more efficient goods and services production.

The Aggregate Production Function

  • Productivity and Inputs Relationship:
    • Shows how real GDP per worker links to physical and human capital levels and technology.
  • Diminishing Returns Pattern:
    • Repeated increases in physical capital yield progressively smaller productivity increases.

Technology and Productivity

  • Influence on Diminishing Returns:
    • Improvements in human capital or technology can mitigate diminishing returns on physical capital.

Growth Accounting

  • Analyzing Economic Growth Factors:
    • Estimates the contributions of productivity and other factors to economic expansion.
    • Total factor productivity (TFP) reflects efficiency in producing output with existing inputs.

Economic Growth & the Environment

  • Interplay with Resources:
    • Economic growth generally increases human environmental impact, posing sustainability questions.
    • Consider innovations (Paris Agreement) aimed at reducing greenhouse gas emissions.

Conclusion: Economic Growth Sustainability

  • Striking a balance between growth and environmental preservation is pivotal.
    • Questions surrounding resource limits and alternative technologies are vital for future growth trajectories.