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Lecture 3

ECO1102 Lecture 3: Week 4_ Jan 31 - 2

6 pages44 viewsSpring 2018

Department
Economics
Course Code
ECO 1102
Professor
David Gray
Lecture
3

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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 A X (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:
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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 changes?
Why are some countries richer than others and why do some countries grow quickly
while others seem stuck in a poverty trap?
Talk about
Productivity & its importance
Principle: A country’s standard of living depends on its ability to produce goods and
services
Depends on productivity: the average quantity of goods and services produced per hour
of a workers time
Let Y = real GDP = quantity of output produced
L = quantity of labour
y/L = productivity
Productivity drives growth
When a nation’s workers very productive
The four components of productivity
1. Physical capital (K)
The stocks of machinery, equipment and structures that allows for the production
of goods and services
Productivity is higher when the average worker has (physical) capital
K/L = capital per worker
An increase in k/L cause in increase in Y/L
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find more resources at oneclass.com
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