The Basics of Economic Growth
• The economic growth rate is the annual percentage change of real GDP.
• The standard of living depends on real GDP per person, which is real GDP divided by the
• Sustained growth of real GDP per person can transform a poor society into a wealthy one.
• We calculate how many years it takes for the level of any variable, including real GDP per
person, to double, by using the Rule of 70.
• The Rule of 70 states that the number of years it takes for the level of any variable to double is
approximately 70 divided by the annual percentage growth rate of the variable.
Long-Term Growth Trends
• Long-term growth trends are the trends in potential GDP.
• Check out Figure 22.2 on p. 520 of your textbook to study real GDP per person in Canada
between 1926 and 2010.
• During this period, real GDP per person grew 2.0 percent a year, on the average.
• Real GDP growth has been similar in Canada, the Europe Big 4 (France, Germany, Italy, and the
United Kingdom), and the United States since 1960. Growth in Japan was very rapid during the
1960s, slower during the 1980s, and even slower during the 1990s.
How Potential GDP Grows
• Potential GDP increases if there is an increase in population or an increase in labour
• Consider an increase in population.
• In the figure, the labour supply curve
shifts rightward from 0S to 1S , the real
wage decreases and the quantity of
labour employed at full employment
increases. • In the figure below, the increase in the full-employment level of labour increases potential
GDP from $1,400 billion to $1,750 billion along the production function.
• With an increase in population, potential
GDP per hour of work decreases.
• Initially, with potential GDP at $1,400
billion and labour hours at 20 billion,
potential GDP per hour of work was $70.
• With the increase in population, potential
GDP is $1,750 billion and labour hours are
30 billion, and potential GDP per hour of
work is $58.33.
• Diminishing returns are the source of the
decrease in potential GDP per hour of
• Labour productivity is the quantity of real
GDP produced by an hour of labour,
calculated by dividing