Economic Growth Key Points

Economic Growth

Economic Growth Over Time

• History of world economic growth:
  • From 1000 BC to 2000 AD.
  • Little to no GDP growth for a long period.
  • The Industrial Revolution marked a significant change.
  • In the last 50 years, global GDP per capita quadrupled.
  • During the 1900s, GDP grew faster than the population, raising the standard of living for many.

Per Capita Growth Rate

• Using real GDP per capita allows description of change in purchasing power for the average person.
• Formula:
  $real \ GDP \ per \ capita \ growth \ rate = nominal \ GDP \ growth \ rate - inflation \ rate - population \ growth \ rate$

Growth in Real GDP Per Capita: Example

• Examples of real GDP per capita growth rate calculation:
  • Panama: Nominal GDP Growth = 15.4%, Inflation = 4%, Population Growth = 1.4%
  • Guatemala: Nominal GDP Growth = 9%, Inflation = 4%, Population Growth = 3%
  • Italy: Nominal GDP Growth = 1.2%, Inflation = 0.4%, Population Growth = -2.4%

Real GDP: Forecast

• Over the last 100 years, the average growth rate was about 2% per year.
• Formula to estimate future GDP (or GDP per capita): $GDP<em>{Year A} = GDP</em>{Year B} \times (1 + Growth \ rate \ proportion)^{(Year A - Year B)}$
  • Note: Growth rate is in proportion (not percent) in this formula.
• Rule of 70:
  • Used to estimate how many years it takes for GDP to double.
    $Years \ until \ income \ doubles = \frac{70}{real \ GDP \ growth \ rate \ (percent)}$
  • Note: Growth rate is in percent (not proportion) here.

Forecasting GDP: You Try

• Example provided:
  • France: 2013 Real GDP per capita = $40,000, Real Growth Rate = 2%
    • 2015 Real GDP per capita = 40,000 × (1+.02)^{(2015-2013)} = $41,616
  • Spain: 2013 Real GDP per capita = $30,000, Real Growth Rate = 0.2%

Rule of 70: You Try

• Example provided:
  • France: 2013 Real GDP per capita = $40,000, Real Growth Rate = 2%
    • Years until income doubles = $70/2 = 35$
  • Spain: 2013 Real GDP per capita = $30,000, Real Growth Rate = 0.2%

Productivity Drives Growth!

• Productivity = output per worker
• Determinants of productivity:
  • Physical capital (K) - stock of equipment and structures
  • Human capital - set of skills, knowledge, experience, health and talent
  • Natural resources - production inputs that come from the earth
  • Technological improvements (A) - innovations that cause the same inputs to produce more outputs.

Public Policy

• Government's role in helping the economy:
  • Government spending (G): directly contributes to the economy, increases level of Y.
  • Encourage determinants of productivity → increase growth:
    1. Promote savings:
       • Domestic saving (S)
       • Foreign direct investment (FDI) - capital investment that comes from outside a country

Public Policy to Encourage Growth (Cont'd)

• Continued policies to encourage growth:
  2. Promote education and health
  3. Promote infrastructure and industrial policy
  4. Promote technological development
  5. Enforce laws that are effective, provide trustworthy government services:
     • Punish those who violate others’ property rights.
     • Enforce contracts between buyers and sellers.
     • Settle disputes.
  6. Maintain stability