Transcript Part 2 - WW Norton & Company

Part 2:
The Long Run
Chapter 3
An Overview
of Long-Run
Economic
Growth
Charles I. Jones
3.1 Introduction
• In this chapter, we learn:
– some facts related to economic growth that
later chapters will seek to explain.
– how economic growth has dramatically
improved welfare around the world.
• this growth is actually a relatively recent
phenomenon.
3.1 Introduction
• In this chapter, we learn:
– some tools used to study economic growth,
including how to calculate growth rates
– why a “ratio scale” makes plots of per
capita GDP easier to understand.
• The United States of a century ago could
be mistaken for Kenya or Bangladesh
today.
• Some countries have seen rapid economic
growth and improvements to health
quality, but many others have not.
3.2 Growth over the
Very Long Run
• Sustained increases in standards of
living are a recent phenomenon.
• Sustained economic growth emerges in
different places at different times.
– Thus, per capita GDP differs remarkably
around the world.
• The Great Divergence
– The recent era of increased difference in
standards of living across countries.
• Before 1700
– Per capita GPD in nations differed only by a
factor of two or three
• Today
– Per capita GPD in differs by a factor of 50 for
several countries.
3.3 Modern Economic Growth
• Timeline: From 1870 to 2000, United
States per capita GDP…
– rose by nearly 15-fold
• Implications for you?
– A typical college student today will earn a
lifetime income about twice his or her
parents.
The Definition of Economic Growth
• Growth of per capita GDP
– The exact rate of change of per capital GDP.
• A percentage change
– The change between two periods divided by
the value of the variable in the initial period.
• Percentage change in GDP between
period t and and t + 1
“new”
GPD
“old”
GPD
• Percentage change between period t and
and t + 1
• Finding the growth rate between that same
period
Growth
Rate
A Population Growth Example
• Population (L below) also works this
way.
• Intuitively, tomorrow’s population in time
period t + 1 depends on today’s
population in period t
• The constant growth rule:
Time
Period
Variable
value in
period t
Initial variable
value in
period 0
Constant
Growth
Rate
The Rule of 70 and the Ratio Scale
• The Rule of 70
– If y grows at a rate of g percent per year,
then the number of years it takes y to
double is approximately equal to 70/g.
• Notes
– Small differences in growth rates result in
large differences over time.
– The time it takes to double only depends
on the growth rate and not the initial value.
• A ratio scale
– Plot where equally spaced tick marks on the
vertical axis are labeled consecutively with
numbers that exhibit a constant ratio
– When plotted on a ratio scale, a variable that
grows at a constant rate will be a straight line.
U.S. GDP on a Ratio Scale
• If a variable is growing at a constant rate it
will be a straight line on a ratio scale
• If growth rates are rising, the slope will be
increasing.
U.S. GDP on a Ratio Scale
• Per capita GDP in the United States has
grown at approximately 2 percent per year
over the last 130 years.
– Easy to see with a ratio scale
– Approximately linear
Calculating Growth Rates
• The rule for computing growth rates
Solve for
growth rate
• This formula can be applied even if the
data does not exhibit constant growth.
3.4 Modern Growth around
the World
• After World War II, growth in Germany
and Japan accelerated.
• Convergence
– Poorer countries will grow faster to “catch
up” to the level of income in richer
countries.
• Brazil had accelerated growth until 1980
and then stagnated
– China and India have had the reverse
pattern.
A Broad Sample of Countries
• Over the period 1960 – 2007
– Some countries have exhibited a negative
growth rate
– Other countries have sustained nearly 6
percent growth
– Most countries have sustained about 2
percent growth.
• Small differences in growth rates result in
large differences in standards of living.
Case Study: People versus
Countries
• Since 1960:
– The bulk of the world’s population is
substantially richer
– The fraction of people living in poverty has
fallen
• A major reason for changes
– Economic growth in China and India
– 40 percent of the world population!
3.5 Some Useful Properties
of Growth Rates
• Growth rates of ratios, products, and
powers follow several simple rules.
• Growth rates obey mathematical operations
that are a level simpler than the operation
on the original variable.
– Variables Divided  Growth Rates subtracted
– Variables Multiplied  Growth Rates added
– Variable taken to a Power number Growth
rate multiplied by that number
• Suppose two variables x and y have
average annual growth rates of gx and gy,
respectively.
• Assume also that gz is the average annual
growth rate of z
• Then the following rules apply:
Enlarged Table 3.1
Case Study: Growth Rules in a Famous
Example, Yt = AtKt1/3Lt2/3
• Applying rules of growth rates
• Original output equation:
• Use multiplication rule to get
• Use exponent rule to get
3.6 The Costs of
Economic Growth
• The benefits of economic growth
– Improvements in health
– Higher incomes
– Increase in the variety of goods and services
• Costs of economic growth include
– Environmental problems
– Income inequality across and within
countries
– Loss of certain types of jobs
• Economists generally have a consensus
that the benefits of economic growth
outweigh the costs.
3.7 A Long-Run Roadmap
• Are there certain policies that will allow
a country to grow faster?
• If not, what about a country’s “nature”
makes it grow at a slower rate?
Summary
• Sustained growth in standards of living
is a very recent phenomenon.
• If the 130,000 years of human history
were warped and collapsed into a single
year, modern economic growth would
have begun only at sunrise on the last
day of the year.
Summary
• Modern economic growth has taken hold in
different places at different times.
• Since several hundred years ago, when
standards of living across countries varied by
no more than a factor of 2 or 3, there has
been a “Great Divergence.”
• Standards of living across countries today
vary by more than a factor of 60.
• Since 1870
– growth in per capita GDP has averaged about
2 percent per year in the United States.
– per capita GDP has risen from about $2,500
to more than $37,000
• Growth rates throughout the world since
1960 show substantial variation
– Negative growth in many poor countries
– Rates as high as 6 percent per year in several
newly industrializing countries, most of which
are in Asia.
• Growth rates typically change over time.
• In Germany and Japan
– Growth picked up considerably after World
War II
– Incomes converged to levels in the United
Kingdom.
– Growth rates have slowed down as this
convergence occurred.
• Brazil exhibited rapid growth in the 1950s
and 1960s and slow growth in the 1980s
and 1990s.
• China showed the opposite pattern.
• Economic growth, especially in India and
China, has dramatically reduced poverty in
the world.
• In 1960
– 2 out of 3 people in the world lived on less
than $5 per day (in today’s prices).
• By 2000
– this number had fallen to only 1 in 10.
Additional Tables and Figures
for Worked Exercises
This concludes the Lecture
Slide Set for Chapter 3
Macroeconomics
Second Edition
by
Charles I. Jones
W. W. Norton & Company
Independent Publishers Since 1923