What is economic growth + why is it important?
Long run increases in GDP per capita.
Important b/c while a 1% change in annual growth seems small, it may lead to large differences in levels of output over time.
Rule of 70
If GDP grows at a rate of g % per year, then the no. of years it takes for GDP to double is approx. = 70/g
Formula for growth rate
Yt = Y(t-1) * (1+g)
Average growth rate, eg. Y(2019) = Y(1960) * (1+g)^(2019-1960)
Examples of correlation between GDP per capita and living standards
The higher the GDP per capita, the higher the life expectancy, happiness, wealth, literacy in a country (+ CO2 emission per person)
Very low GDP per capita, very high extreme poverty
3 costs of economic growth (still outweighed by benefits)
- Environmental problems, eg. pollution, global warming; pollution worsens initially as an economy develops but often improves eventually
- Increased income inequality
- Loss of certain jobs & industries due to technological advances; but we get a tremendous rise in agricultural productivity
8 economic growth facts
- Before Industrial Revolution in around 1800, there was little difference in living standards over time and across countries.
- Since IR, per capita income growth has been sustained in the richest countries. In the US (and most developed countries), average annual growth in per capita income is about 2% since 1900.
- There is a -ve correlation between population growth rate & real per capita income across countries.
- Differences in per capita incomes increased dramatically among countries between 1800 and 1950, with the gap widening between Western European countries, the US, Canada, Australia & NZ as a group, and the rest of the world.
- Growth rates of real per capita income are more alike between richer countries than between poor countries.
- Hours worked tend to decrease over time for developed economies.
- There is no correlation between the real income per capita & the growth rate in real income per capita between 1970 and 2007, indicating no tendency for convergence in per capita incomes in the world over this period.
- There is a +ve correlation between the investment rate & output per worker across countries.
Cobb-Douglas production function + meaning of Abar/TFP (total factor productivity)
- has CONSTANT returns to scale
- assume everybody works
Y = F(K,L) = Abar * K^1/3 * L^2/3
Abar/TFP is a measure of how efficiently a country is using its factor inputs. The higher the A, the more consumption goods we are able to produce with the fixed no. of inputs we have. (eg. technological advances)
Formula of production function at equilibrium + how much capital and labour do we hire?
*0 profit in economy at equilibrium
Y* = rK + wL
where r = rental rate, w = wage rate
All income is paid to capital or labour at eq.
Hire capital until MPK = r
Hire labour until MPL = w
Why are countries rich? Relate to the production function.
Countries are rich b/c they have high capital per person and MOST IMPORTANTLY, have high TFP (high efficiency in using capital/labour)
