1. Module 37: Long-run Economic Growth
Created By: Alondra Montes, Nathaniel Leoncini, David Rodriguez
and Jordan Lebron

2. Looking at Economies Over Time
There are several sources that lead to long-run economic growth
Before observing these sources, we’ll first look at how the U.S. economy has grown over time
The key indicator of long-run growth is real GDP per capita

3. Real GDP per Capita Key statistic to track economic growth
Definition: real GDP divided by the population size
Tells us how much of the national GDP an individual accounts for
Should not be a policy goal to increases but is a good measure of economic progress

4. Why use Real GDP per Capita as an Indicator
GDP accounts for the total value of final goods and services in an economy in a given year
Real GDP eliminates the effects of rising price levels (inflation)
Real GDP per Capita isolates the effect of change in population size

5. Table U.S. Real GDP per Capita Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

6. U.S. Real GDP per Capita
The U.S. economy has seen great growth in the last century
In 2008, the economy produced 684% as much per person as it did in 1908
This means an individual produces almost seven times what they did a century ago

7. U.S. Real GDP per Capita
Family income typically grows proportional to per capita income
So a 5% increase in income per capita would roughly result in a 5% increase in family income

8. Figure Economic Growth in the United States, India, and China over the Past Century Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Economic Growth Comparison
The previous slide compared economic growth (Real GDP per capita) of the U.S., India, and China
Despite great growth of the U.S. economy, not all nations have experienced the same growth
Actually, many nations have a standard of living only equal to or less than that of the U.S. in 1908

10. China and India
China has seen their economy grow by leaps and bounds in the past few decades
Despite great growth, they only have a standard of living equal to the U.S. in 1908
India has also seen growth, but at a much less rapid pace
They have yet to reach 1908 levels seen in the U.S.

11. Figure Incomes Around the World, 2008 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Incomes Around the World
Much of the world remains poor in comparison to the industrialized nations
The majority of these nations are in North America, Europe, and some Pacific nations
50% of the world lives in countries with a lower standard of living than the United States in 1908

13. Growth Rates Long-run economic growth is usually a gradual process
Real GDP per capita will generally only grow a few percentage points every year
To show a relationship between the annual growth rate in real GDP per capita and change in the long run, economist use what is known as the Rule of 70

14. 70/annual growth rate of variable
Rule of 70
A mathematical equation that tells us the time it takes a variable that grows gradually over time to double
Number of years for a variable to double =
70/annual growth rate of variable

15. Figure Comparing Recent Growth Rates Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

16. How to Apply Rule of 70
China’s current level of economic growth is 8.8%
Applying the Rule of 70, we can determine how long it will take for China’s economy to double
70/8.8 = 8
In approximately 8 years, China’s economy will have doubled
In 24 years, the economy will have doubled 3 times, making the economy 8 times bigger
8 x 3 = 24
2 x 2 x 2 = 8

17. Sources of Long-run Growth
Long-run economic growth is reliant on rising productivity.
Sustained growth in real GDP per capita occurs only when the amount of output produced by the average worker increases steadily.
This happens because of increased productivity
Labor productivity, or productivity is output per worker.
Sources include: Physical Capital, Human Capital and Technology

18. Physical Capital
Definition: consists of human-made goods such as buildings and machines used to produce other goods and services.
Examples of this would be using a sewing as opposed to sewing it by hand or in car manufacturing plants the robots that assist in putting the car together.

19. Human Capital
Definition: the improvement in labor created by the education and knowledge of members of the workforce.
An example of this would be firms requiring their employees to have a college degree. A higher number of people are attaining college degrees as opposed to a century ago.

20. Technology
Definition: the technical means for the production of goods and services
Examples of this would be computers, calculators and cars.