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Long-Run Economic Growth

Long-Run Economic Growth. Real GDP per Capita. Key statistic to track economic growth Real GDP (adjusted for inflation) per capita (to remove effect of population changes) Income of “typical” family normally grows in proportion to per capita income. Growth Rates.

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Long-Run Economic Growth

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  1. Long-Run Economic Growth

  2. Real GDP per Capita • Key statistic to track economic growth • Real GDP (adjusted for inflation) per capita (to remove effect of population changes) • Income of “typical” family normally grows in proportion to per capita income

  3. Growth Rates • Long-run growth is achieved gradually • At any given annual growth rate, use Rule of 70 to determine how long it takes real GDP to double # of years to double = 70/annual growth rate

  4. Sources of Long-Run Growth • Key to long-run growth is rising productivity • Output per worker (GDP/number of people working) • In the long-run, population growth tends to explain employment growth (real GDP per capita negates this effect)

  5. Factors of Growing Productivity • Physical capital – Increases in manufactured goods used to produce other goods & services • Human capital – Improvement in education & knowledge • Technology – Progress in technical means for production – Increases Total Factor Productivity

  6. Aggregate Production Function • APF is a formula economists use to separate out the effects of the 3 factors • Diminishing returns to physical capital – Increases in amount of physical capital leads to smaller increases in productivity • Diminishing returns for tech and human capital as well • Growth accounting estimates contribution of each major factor in APF

  7. Natural Resources • Ceteris paribus, countries with abundant valuable resources have higher RGDP per capita • In the real world, the other 3 factors are much more important determinants

  8. Case Studies – What has been the economic outcome for each of the following, and why? Convergence hypothesis – Difference in real GDP per capita narrows over time because countries that start with lower GDP per capita tend to have higher growth rates

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