Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #1 The Facts of Growth – The Long Run

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #2 The Facts of Growth – The Long Run (Real GDP at Purchasing Power Parity) Annual Growth RateReal Output per Capita Output per Capita (%)(1992 dollars) Ratio of Real Ouput Per Capita /1950 France ,15019, Germany ,35620, Japan ,82019, United Kingdom ,87019, United States ,17025, Average ,87220,8043.5

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #3 The Facts of Growth – The Long Run Observations Strong growth Growth rates have decreased since the mid 1970s % (GDP/capita doubles every 16 years) % (GDP/capita doubles every 37 years) Convergence in output/capita across countries???

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #4 The Facts of Growth – The Long Run Convergence in Output/Capita – The OECD

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #5 The Facts of Growth – The Very Long Run Looking across two millennia From the end of the Roman Empire to 1500, no output per capita growth in Europe Small growth in output per capita (0.1%/year and 0.2%/year 1700 to 1820) Modest growth (U.S. = 1.5%) The high-growth of the 1950s and 1960s is unusual Leaders in output/capita change frequently: Italy  Netherlands  U.K.  US

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #6 The Facts of Growth – The Long Run Looking Across Lots of Countries – Convergence ???

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #7 The Facts of Growth – The Long Run Looking Across Countries – A Closer Look

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #8 The Facts of Growth – The Long Run A Summary 1.Growth is not a historical necessity There’s been lots of stagnation and decline 2.Convergence of OECD countries to the U.S. may be the prelude to leapfrogging 3.The rapid post WWII growth was atypical

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #9 The Facts of Growth – The Long Run Thinking About Growth: A Primer (The Solow Model) The Aggregate Production Function Y = F (K, N) Y = Aggregate Output K = Capital N = Labor F: Depends on technology

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #10 The Facts of Growth – The Long Run Returns to Scale and Returns to Factors Constant returns to scale:2Y = F(2K,2N) xY = F(xK,xN) Double all inputs  Double output Decreasing returns to factors (capital & labor): Increases in K and N lead to smaller and smaller increases in output Diminishing Marginal Productivity of Labor (MPL) Diminishing Marginal Productivity of Kapital (MPK)

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #11 The Facts of Growth – The Long Run Output and Capital per worker: Y/N and K/N

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #12 The Facts of Growth – The Long Run Output and Capital per worker: Diminishing MPL Output per worker, Y/N Capital per worker, K/N Y/N = (K/N, 1) A A´ B´ B C´ C D´ D

Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #13 F(K/N, 1) The Facts of Growth – The Long Run The Sources of Growth An improvement in technology shifts the production function up Output per worker, Y/N Capital per worker, K/N A A´ B´