topic 3

topic 3

LONG-RUN ECONOMIC GROWTH

Sustained increases in standards of living are a relatively recent phenomenon.

The chart by Angus Maddison shows this.

Most of the world is richer than in 1960. Today about 600 million fall below $5US/day instead of 4 billion in 1960. Growth in Chaina and India ccounted for 40 per cent of the world population and a lot of the decrease in poverty.

The rule of 70 illustrates how small changes in growth rates have major effects on growth.

Under a 2 per cent growth rate income will quadruple in 70 years. Under a 3 per cent growth rate it will increase eight times in 70 years.

Some countries have consist growth, other periods of high growth, and some have plateaued out or even negative growth.

Some properties of grwoth rates:

if z = x/y then gz = gx - gy
if z = x.y then gz = gx +gy
if z = xa then gz = a.gx


yt =y0(1 +g)t where y is growth and g is the rate of growth.

An Example of a Growth Model

Yt = AtKt(1/3)Lt(2/3)

Yt = growth
At = technology
Kt = capital
Lt = labor


g(Yt) = g(At) + 1/3.g(Kt) + 2/3g(lt)

where g(.) is the growth rate

Growth has costs

• environment
• inequality

Robert Lucas stimulated growth research with his lectures on economic growth. (JME, 1988)