real GDP growth rate
(Real GDP now- previous)/previous X 100
real GDP per person
real GDP / population
calculating real GDP per person growth rate
subtract pop growth from real GDP growth
rule of 70
number of years it takes something to double is approx. 70/annual percentage growth rate
what is real GDP
gdp which accounts for price changes and levels. nominal GDP is gdp not accounting for these changes
all sources of economic growth come down to these two categories
Aggregate hours and labor productivity
factors which affect aggregate hours
working age population growth
changes in the employment-to-population ratio
changes in average hours per worker
growth of working age vs total population
working age growing faster due to the baby boom generation
employment to population ratio
just what it sounds like. used in combination with average hours per worker gives average hours per working age person
main driver of of agregate hours growth
population growth. average hours per person is pretty consistent
quantity of real GDP produced by an hour of labor. calculated based on
labor productivity = real GDP / aggregate hours
growth of labor prductivity depends on 3 things
physical capital growth
human capital growth
how does physical capital grow
from savings and investment descisions (refers to capital in terms of tractors assembly lines etc.) allows more to be done per person per hour
human capital growth
accumulated skill and knowledge of humans
obvious helps people make more meaningful contributions
most basic precondition for economic growth
three important institutions for incentive system
markets, property rights, monetary exchange
a tool used to calculate quantitative contribution to real GDP growth of each of its sources
a 1 percent increase in capital per hour of labor brings a 1/3 percent increase in labor productivity. given no increase in technology etc.
use 1/3rd rule for this: if 3 percent increase in capital and output increased by 2.5 % what was from capital and what was from technology
1.5 from technology and 1 from capital increase because 1/3*3=1 fro increase from capital
5 ways to achieve faster growth
stimulate saving, stimulate RnD, target high technology industry, encourage international trade, improve quality of education
walk through increase in labor productivity
labor productivity grows, potential gdp grows, real wage rate rises, aggregate hours increase. there is a limit to aggregate hours as supply of hours becomes vertical at a certain limit.
walk through an increase in population relative to aggregate labor hours and potential GDP
decrease in wage rate as supply labor increases. potential GDP also increases. marginal product of labor diminishes real GDP increases as hours per year increases but GDP per hour of labor decreases.
Three growth theories
Classical growth theory
neoclassical growth theory
new growth theory
Classical growth theory, other name and definition
also known as Malthusian theory. view that growth of real DGP per person is temporary and that when it rises above the subsistance level population explosion eventually brings it back to subsistence level. (quick version: increased prosperity leads to increased population which again lowers gdp per person and prosperity decreases)
malthusian view on population growth
that we need to control it or population increase will dry up resources and GDP per person will return to a primitive level.
subsistance wage rate
real wage rate where people can just survive. when rate is above this population increases and diminishing returns on labor are established. dismal view because according to classical thoery of pop growth GDP increase leads to increase population and lowering of productivity of labor and back to subsistance level of real wage rate
Neoclassical growth model
proposition that real GDP per person grows because technological changes induce a level of saving and investment that makes capital per hour of labor grow.growth ends only if technological change stops
neoclassical view on population change
that technology increases the opportunity cost of a woman's time so decreases birth rate and technology also lowers death rate so population stable. no effect from economic factors
key assumption of neoclassical argument
real interest rates and target rate of return determine savings. If real interest rate > target rate capital per hour labor grows, real ir< target capital per hour labor shrinks. if = savings is just sufficient to maintain the quantity of capital per hour.
neoclassical theory on growth lasting?
prosperity will last but growth will only continue such that technology continues to advance
one problem with neoclassical growth theory
shows that growth rates and income levels per person should converge from rich countries to poor countries. No evidence of this. so move to New growth theory
new growth theory. 2 important factors also
says that real GDP per person grows because of the choices people make in pursuit of profit and that growth can persist indefinitely...
important factors: discoveries are a public good, knowledge is capital not subject to diminishing returns
what slows growth in New growth theory
nothing. it can expand at will because knowledge does not have diminishing returns.
general cycle description in new growth theory
want higher standard of living, incentives innovation , make more money, want higher standard of living
new growth vs malthusian what is glaring difference.
in malthusian people are what kills the economy
in new growth people are part of the solution!