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Lecture 3

ECO1102 Lecture 3: Week 4_ Jan 31 - 2

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David Gray

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January 31 Chapter 9: Economic Growth World economic growth over time Rapid economic growth is a modern phenomenon Before 1800, economic growing ws just fast enough to keep up with the very slow population growth There was little change in real GDP per capita (purchasing power) GDP and population began to grow during the Industrial Revolution After 1800, particularly in Europe Growth Real formula for real GDP per capita Real GDP = Nominal GDP GDP Deflator Real GDP per capita = Real GDP Population = Nominal GDP GDP Deflator X Population Growth rate = % change Real GDP per capita = % change in Nominal GDP - Inflation - % change in Population Compounding Economic growth builds on itself over time - the base grows yearly This process is similar to compounding interest in a savings account A small annual growth rate can result in a large change in an economy over time The total change in much bigger than the annual growth rate suggests Canadian real GDP per capita, 1870 - 2016 (1926 = 100) Canadian average annual growth in real GDP per capita was 1.8% over the past 146 years Equates to real GDP per capita being 14 times larger Compounding formula and the rule of 70 The future value of GDP per capita can be estimated using an average growth rate and any base year value GDP Yr B = GDP Yr AX (1 + Growth rate )No. of yrs See derivation in textbook A simple shortcut to understand how many years it takes for GDP to double is the rule of 70:2 = 1 X (1 + Growth rate) No. of yrs In 2 = No. of yrs X In (1+ Growth rate) No. of yrs for income to double = 0.693 In(1 + Growth rate) If the growth rate 2%, then No. of yrs for income to double = 0.693 = 0.692 X 100 = 70 = 35 In (1.02) = 0.0198 X 100 = 2 Thus, the number of years until income doubles = 70 Real GDP growth rate Real GDP per capita among countries Standards of living (or income per person)among countries very tremendously At a point in time and are reflected in large differences in quality of living Over time (growth) But country rankins can, and have, changed Poorer countries do not have stay poorer and richer and richer countries have no guarantee they will stay richer Few decade of strong What causes of the differences and cha
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