Unit 14 Economic Growth Student Notes Introduction In this unit we will discuss economic growth and its importance Economists do not completely understand what leads to economic growth but they do agree increases in capital per worker technological progress human capital and the quality of our governmental and social institutions are key factors All of these factors lead to increases in productivity We will discuss productivity and simple production functions Growth in GDP over time plays a large part in determining our standard of living in the future GDP per capita varies greatly throughout the world and so do growth rates in GDP in various countries We will discuss some reasons why this might be Reading Sources Textbooks Principles of Economics 2e from OpenStax Digital ISBN 1947172379 The textbook can be purchased or downloaded for free at https openstax org details books principles economics 2e THE ECONOMY from The CORE Project Economics Department University College London The textbook can be viewed and downloaded for free at https core econ org the economy index html Chapters Chapter 20 Economic Growth UNIT 16 TECHNOLOGICAL PROGRESS EMPLOYMENT AND LIVING STANDARDS IN THE LONG RUN Readings and Videos for this Unit The following sections from the two textbooks should be studied in order Use the active links in this document to bring up the sections in a browser otherwise use a download version of the textbook The videos are recommended supplements Textbook Section Videos 1 CORE 16 0 Technological progress employment and living standards in the long run Understanding economic growth AP Macroeconomics Khan Academy 2 openstax 2e 20 0 Economic Growth Labour Productivity 3 openstax 2e 20 1 The Relatively Recent Arrival of Economic Growth Intro to the Solow Model of Economic Growth MRU Macroeconomics Miller Unit 14 Page 1 4 openstax 2e 20 2 Labor Productivity and Economic Growth Physical Capital and Diminishing Returns MRU 5 openstax 2e 20 3 Components of Economic Growth Puzzle of Growth Rich Countries and Poor Countries MRU 6 openstax 2e 20 4 Economic Convergence Are We Running Out of Resources Additional Instructor Comments Topic 01 Growth Rates A subtle point from the video Understanding economic growth AP Macroeconomics Khan Academy is when we talk about economic growth we are focusing on the economy s potential growth It has less to do with the ups and downs of the business cycle We can visualize economic growth in three ways 1 a shifting outward of the production possibilities curve 2 the rightward shifting of the long run aggregate supply curve 3 an upward sloping trendline of potential GDP See the below curves in order Our output our GDP and the growth in our GDP really depends on two things 1 How many hours per year we collectively work We could think of the 160 million workers in our country working 52 weeks a year multiplied by the average work week And 2 how productive we are Our productivity depends on many things but in the graphic below we see the level of our technology amount and quality of our capital along with our education and skills as the basis of human capital are important Macroeconomics Miller Unit 14 Page 2 Topic 02 Rule of 72 A quick rule of thumb to find out how many periods it takes a quantity to double based on its growth rate is the Rule of 72 Simply divide 72 by the growth rate and the answer is the number of periods to double For example if the bacteria in a petri dish in a biology lab is growing at a rate of 18 a day then 72 divided by 18 4 It will take four days for the bacteria to double in size This is just an approximation In fact some people use the Rule of 70 It s the same idea but its 70 divided by the growth rate The Rule of 70 is a better approximation for smaller growth rates Rule of 72 If an economy grows at x percent per year output will double in 72 x years Question 01 If you invest 10 000 in a bond fund that pays 8 interest a year using the rule of 72 in how many years will your investment double in value Question 02 If a country s GDP is 10 000 billion and the economy is growing at 6 a year using the rule of 72 in how many years will it take this country s economy to double See footnote for answers1 One important idea when comparing growth rates of economies around the world is that small differences can have a big impact over time If country A has an economy growing by 2 it will take 36 years to double and in the space of 72 years about an average live time the economy could double and double again Starting at 100 billion country A could be 400 billion in 72 years 1 Question 01 answer is 9 years Question 02 answer is 12 years Macroeconomics Miller Unit 14 Page 3 On the other hand if country B has an economy growing by 3 it will take 24 years to double and in the space of 72 years about an average live time the economy could double double and double again three times Starting at 100 billion country B could be 800 billion in 72 years So a small difference 2 to 3 can have a big impact after several or more decades See the table from Mankiw s Macroeconomics textbook 9th edition See a short video on the What is The Rule of 72 Topic 03 Calculating Growth Rates The growth rate formula below adapted for economic growth measures the percentage rate of change in GDP from one year to the next 2 1 1 100 We could use this formula to calculate the growth rate in real GDP for the United States in 2018 and 2019 from the prior year If you do so you should see the U S economy grew at 2 33 in 2019 and 2 93 in 2018 2017 2018 2019 18 108 1 18 638 2 19 073 1 U S Real Gross domestic product 2017 2018 100 Macroeconomics Miller Unit 14 Page 4 Topic 04 Productivity Labor productivity is the output produced per hour of work We could measure the output as something physical like 20 bushels of corn harvested per hour Or we could measure the output as a dollar value as in 80 worth of corn harvested per hour Either way is acceptable to measure productivity Below are two examples see footnote for the answers Question 03 Question 04 2 Hit It company produces 320 baseball bats per day using 2 workers who each work 8 hours per day What is Hit It s productivity All Sports company produces 2 560 worth of baseballs baskets balls and golf balls per day using 4 workers who each work 8 hours per day What is All Sports productivity a 2 560 b 160 of goods per hour c 80 of goods per hour d 20 of goods per hour a 320 baseball bats b 160 baseball bats per hour c …