We saw that economic growth can be measured by the rate of increase in potential output. Measuring the rate of increase in actual real GDP can confuse growth statistics by introducing elements of cyclical variation.
Growth is an exponential process. A variable increasing at a fixed percentage rate doubles over fixed intervals. The doubling time is approximated by the rule of 72. The exponential nature of growth means that small differences in growth rates have large effects over long periods of time. Per capita rates of increase in real GDP are found by subtracting the growth rate of the population from the growth rate of GDP.
Growth can be shown in the model of aggregate demand and aggregate supply as a series of rightward shifts in the long-run aggregate supply curve. The position of the LRAS is determined by the aggregate production function and by the demand and supply curves for labor. A rightward shift in LRAS results either from an upward shift in the production function, due to increases in factors of production other than labor or to improvements in technology, or from an increase in the demand for or the supply of labor.
Saving plays an important role in economic growth, because it allows for more capital to be available for future production, so the rate of economic growth can rise. Saving thus promotes growth.
In recent years, rates of growth among the world’s industrialized countries have grown more disparate. Recent research suggests this may be related to differing labor and product market conditions, differences in the diffusion of information and communications technologies, as well as differences in macroeconomic and trade policies. Evidence on the role that government plays in economic growth was less conclusive.
The population of the world in 2003 was 6.314 billion. It grew between 1975 and 2003 at an annual rate of 1.6%. Assume that it continues to grow at this rate.
With a world population in 2003 of 6.314 billion and a projected population growth rate of 1.1% instead (which is the United Nations’ projection for the period 2003 to 2015).
Suppose a country’s population grows at the rate of 2% per year and its output grows at the rate of 3% per year.
The rate of economic growth per capita in France from 1996 to 2000 was 1.9% per year, while in Korea over the same period it was 4.2%. Per capita real GDP was $28,900 in France in 2003, and $12,700 in Korea. Assume the growth rates for each country remain the same.
Suppose real GDPs in country A and country B are identical at $10 trillion dollars in 2005. Suppose country A’s economic growth rate is 2% and country B’s is 4% and both growth rates remain constant over time.
Suppose country A’s population grows 1% per year and country B’s population grows 3% per year.
Suppose the information below characterizes an economy:
Employment (in millions) | Real GDP (in billions) |
---|---|
1 | 200 |
2 | 700 |
3 | 1,100 |
4 | 1,400 |
5 | 1,650 |
6 | 1,850 |
7 | 2,000 |
8 | 2,100 |
9 | 2,170 |
10 | 2,200 |
Suppose that improvement in technology means that real GDP at each level of employment rises by $200 billion.
In Table 8.1 "Growing Disparities in Rates of Economic Growth", we can see that Japan’s growth rate of per capita real GDP fell from 3.3% per year in the 1980s to 1.4% per year in the 1990s.