Transcript Long Run Econ Growth

Long Run Econ Growth
Chapter 6-3
The Phases of the Business Cycle
Expansion
Recession
Expansion
Total Output
Peak
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McGraw-Hill/Irwin
Trough
Secular
growth
trend
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Long-Run Economic Growth
Secular long-run growth, or long-run growth, is the
sustained upward trend in aggregate output per person
over several decades.
A country can achieve a permanent increase in the
standard of living of its citizens only through long-run
growth. So a central concern of macroeconomics is
what determines long-run growth.
U.S. real gross domestic product per person
from 1900 to 2004
Real GDP Per Capita
• As a result of this long-run growth, the
U.S. economy’s aggregate output per
person was about 7.5 times as large in
2004 as it was in 1900.
• The ups and downs of business
cycles in the long-run don’t make a
difference.
Note
• Note that there was a 7.5-fold increase
in real GDP per capita over the same
period in which there was a 20-fold
increase in real GDP
• The difference in these two numbers
is due to a much larger U.S.
population in 2004 compared to 1900.
For inquiring minds
• Long run growth is a relatively
modern phenomenon
• The idea of being better off than your
parents is a new phenomenon
Two models in Macroeconomics
• Long-run growth is the key to higher
wages and rising standard of living.
• Sometime what is good in the longrun can be bad in the short run and
vice versa.
• Example Paradox of Thrift
Econ in Action
• In the long-run one percent (one point)
is a big number.
• Because of compounding after 25
years an economy growing at 2.5%
will be 30% larger than one that grows
at 3.5%
• Look at the example in the book
comparing the late 1990s to the 1970s