Section 2 Why Economies Grow in the Long Run Data Economists measure well being with real per capita GDP Ex U S Australia China Haiti 52 800 43 000 9 800 21 300 growth measured by changes in real per capita GDP Part A Is Economic Growth Zero Sum Do some countries get rich by making others poorer Economic Growth Zero Sum Zero sum one person s or group s gain comes as a loss for another Ex Poker Q If countries get rich at the expense of other countries zero sum what would then be the case with world real per capita GDP over the years Q Now after looking at the data in your view are some countries rich because they have taken wealth income and resources from poor countries i e world growth is zero sum A B C fall rise stay about the same A yes B C no it is an even mix of factors End of Part A Is Economic Growth Zero Sum NO Stunning something from nothing Most important human invention Growth started 1750 in Great Britain What happened there and then and spread around the world Part B Rates of Economic Growth Q What average annual growth rate will make your life radically different from the lives of you grandparents Rates of Growth Survey Average year your age 1959 Cars States Bedroom Real GDP per person 2013 base now Then 3 47 1 15 12 3 3 8 2 1 0 38 17 750 52 800 2 97 22 with no car factor larger 3 02 3 24 Growth Rates and the Rule of 70 Ex CPI 200 204 in 1 year growth rate 204 1 0 02 200 growth rate over 1 year x0 x1 x1 1 g x0 g average annual growth over 2 years growth rate x2 1 g x1 x1 x2 x2 1 g 1 g x0 x2 1 g 2 x0 growth over n years xn 1 g n x0 If xn and xo are known g g xn xo 1 n 1 Most useful format g Growth Rates Real GDP Real Price CPI GDP deflator Reminder multiply by 100 if you want percent Q For how many of the following do we have specific names for their growth rates Both inflation and economic growth are computed by percentage change data 1 year apart g between any 2 years Rates of Growth and the Rule of 70 Rule of 70 an easy to use approximation for the approximate years something takes to double in size years to double 70 growth rate Ex CPI growth inflation and Rule of 70 3 2 year and 23X larger last 100 years 70 3 2 22 years to double 22 years 2X 44 years 4X 66 years 6X 88 years 16X 110 years 32X Observation small annual growth rate huge change over many years Rates of Growth Survey Q What was he average annual growth rate of real per capita GDP g xn x0 1 n 1 52 800 17 750 1 55 1 2 0 Is this rate common in U S history U S Growth Rates Real per capita GDP 1800 1 600 Haiti 2013 52 800 g 52 800 1 600 1 2013 1 1 66 Doubling time rule of 70 70 1 66 42 years Since U S Civil War growth rate 1 86 doubling time 38 years Q Are these values adjusted for inflation A YES Q Is the U S growth rate of 2 since 1957 common A Yes Greece Brazil Egypt Pakistan Haiti China s Growth Rate Real per capita GDP2013 9 800 Real per capita GDP1977 350 Q What is China s annual growth rate g 9800 350 1 36 1 9 7 A Rule of 70 70 9 7 7 2 years for real GDP to double End of Part B Rates of Economic Growth Q What annual growth rate will make your life radically different from the lives of your grandparents A 2 0 and this is common across U S history China s 10 growth is visible in just a few years Small annual growth rates have a big impact over the years Part C The Role of Capital K and Technology in Growth Q Here s the production per worker U S 111 050 2011 China 17 600 Haiti 4 600 45 090 1959 2 5X larger These directly lead to the huge differences we see in real per capita GDP But why does Y L vary so much What can a poor country do This is labor productivity and is measured by real GDP worker or Y L base year 2011 U S History of K L Year 1925 1959 2011 Capital Worker K L 43 300 81 700 203 700 In 2011 values i e real billions of dollars China and especially Haiti have much lower vales of K L Capital 1 675 5 150 28 500 Technology Another common word we use in an uncommon way Def technology is something that increases production without an increase in the amount of capital or labor Types better capital K better organized production more human capital Q Say that production increased for the following reasons How many of these would economists call technology Foxconn doubles the of existing machines Intel trains all of its workers United Airlines buys more efficient airliners that burn less fuel UPS optimizes delivery routes in part by minimizing left hand turns Role of Capital K and Technology in Growth Q Why does labor productivity Y L vary so much 45 090 1959 2 5X larger U S 111 050 2011 China 17 600 Haiti 4 600 A K L and technology in turn vary But the specifics We need the Per Workers Production Function Review Question Q For the U S which of these is the largest in value A Y L labor productivity how much the average worker produces 111 050 B Real per capita GDP includes real income per person 52 800 Per Worker Production Function Micro Ex Micro Example Panini Shop with one worker Q In this shop as capital Panini machines increases ceteris paribus it is most accurate to say that output sandwiches A B C increases at an increasing rate increases at a constant rate increases at a decreasing rate diminishing returns to capital Sandwiches output 175 150 100 with 1 worker 1 0 Panini machines capital 3 2