ECONOMICS GROWTH THE ECONOMY IN THE LONG RUN INTRODUCTION TO ECONOMIC GROWTH 1 Why do some Economies grow and others don t Growth is the change in real GDP over time Definition Growth Rate The annual percentage change in real GDP Y But what we real care about is the change in real per capita GDP Becuase we must take into consideration how many people are in that country For example China has the second highest economic growth in the world but does that make it the second rich est country in the world The answer is no because we must take into account the fact that their population is so high It is the growth rate of real per capita GDP that correlates most closely with improve ment Growth rate of real per capita GDP Growth rate of Y Growth rate of population Y pop While U S GDP growth has been about 3 6 percent per year in the post war era the U S population has grown at about 1 6 percent Hence per capita GDP growth in the U S has been about 3 6 1 6 2 The significance of Growth Economics Growth is the ultimate determinant of such variable such as 1 2 3 4 Nutrition Literacy Infant mortality Life expectancy GRAPH GROWTH AND HEALTH 1999 vs 2006 Shows the effect of Economic Growth on Life Expectancy Even our use of our time changes with Economic Growth GRAPH GROWTH AND THE USE OF TIME 1880 1995 and 2040 More leisure time as time progresses The Importance of Growth Country United States Japan Germany Russia Mexico Brazil China Indonesia India Pakistan Real GDP per Life Adult literacy Internet usage person 2005 41 890 expectancy 78 years of population 99 of population 63 31 267 29 461 10 845 10 751 8 402 6 757 3 843 3 452 2 370 2 053 82 79 65 76 72 72 70 64 65 63 99 99 99 92 89 91 90 61 50 47 67 45 15 18 19 9 7 3 7 0 3 The table shows GDP per person and three other measures of the quality of life for twelve major countries Human Welfare in the Short and Long Run In a recession like in the present recession real GDP per capita in the U S falls by just one or or two percentage points relative to the level of potential GDP Even small differences in growth rates differences of 1 or 2 percentage points can lead over time to huge reductions in real per capita GDP of 20 or more below potential GDP Example India Every economists example of stagnate economic growth 1945 1995 Average annual growth rate 1 3 At this rate it would have taken Indian per capita GDP about 200 years to reach the current U S Level Since 1995 average annual growth rate 6 At this rate India can achieve U S levels or per capita GDP in around 45 years Therefore Growth makes a huge difference to living standards and the process of life and death There are two dimensions to growth GRAPH GROWTH IN THE U S REAL PER CAPITA GDP 1900 2006 SUMMARY These figures are measured in terms of the prices in 2000 The Post War period after WW1 growth really took over Started in 1945 and continued into the 50 s and 60 s and then steadily continued GRAPH ECONOMIC GROWTH FROM 1 MILLION BC TO THE PRESENT SUMMARY Looking at the world as a whole growth has been a recent phenomenon Prior to this growth was not an issue because growth didn t happen The two dimensions 1 Growth in one country or region over time 2 Growth differences across countries CHART CHINA vs JAPAN CHINA JAPAN Infant mortality per 1 000 live births 23 Percentage of the population surviving on less than 2 per day Percentage of the population with access to treated water Percentage of the population with access to improved sanitation 47 77 44 3 0 100 100 Internet users per 1 000 people 73 587 There are two key facts that jump out at us when we discuss Economic Growth these are Fact One How it affects living standards this is shown by looking at the GDP per capita figures TABLE GROWTH AROUND THE WORLD China Singapore Japan Spain India Israel United States Canada Colombia 6 572 29 921 30 821 26 125 3 486 25 670 41 854 32 886 7 769 5 8 5 4 3 8 3 2 2 7 2 7 2 2 2 1 1 8 New Zealand Philippines Argentina Saudi Arabia Rwanda Haiti 22 511 4 920 14 421 14 729 1 333 1 836 1 4 1 4 1 0 0 8 0 3 1 2 SUMMARY There is a huge spread between GDP per capita in the poor countries and the rich ones therefore allowing us to see the difference in living standards Fact Two There is also great variation in growth rates across countries Incomes and Growth Around the World Since growth rates vary the country rankings can change over time Poor countries are not necessarily doomed to poverty forever e g Singapore in comes were love in 1969 but not are quite high Rich countries can t take their status for granted They may be overtaken by poorer but faster growing countries Differences in Growth Rates within Africa Even within the same region there are different growth rates INCLUDE GRAPH DIFFERENCES IN GROWTH RATE WITHIN AFRICA Once one starts to think about economic growth it is hard to think about anything else Nobel Laureate Robert Lucas on Growth 1988 Calculating Growth Growth rate between two years GDP in later year GDP in earlier year GDP in earlier year x 100 Example Growth between 1999 and 2009 In 1999 real GDP 10 8 Trillion In 2009 real GDP 12 9 Trillion Calculate growth between 1999 and 2009 GDP in 2009 GDP in 1999 GDP in 1999 x 100 12 9 Trillion 10 8 Trillion 10 8 Trillion x 100 0 19 x 100 19 Example 2 In 2008 real GDP 13 2 Trillion In 2009 real GDP 12 9 Trillion Growth between 2008 and 2009 GDP in 2009 GDP in 2008 GDP in 2008 x 100 12 9 Trillion 13 2 Trillion 13 2 Trillion x 100 0 023 x 100 2 3 This is evidence of the impact of the recession it contracted the economy by a little over 2 The Rule of 70 This is a quick way to find out how long anything will take to double it is an estimate 70 Growth Rate Example The Growth Rate on a bank account is 2 70 2 35 years Therefore it takes 35 years for you to double your money The Role of a Growth Model This helps you figure out whats important This helps you find the common elements and common factors Definition for Growth Model Identifies the key factors which determine growth Basic Model Used by Economists Solow Model developed by Robert Solow in 1956 This is the basic model used for us to understand the Economic …