Macroeconomics (HUL213)

Lecture 04
Jan 11; 2024
An Overview of Long-Run Economic Growth
Figure: Enter Caption
Growth Over the Very Long Run - 1

Economists often use GDP per capita as a proxy for standards of living.
However, GDP per capita is preferred over the level of GDP because it
begins to assess the distribution of wealth (average) within a country.
Until about 12,000 years ago, humans were hunters and gatherers.
An agricultural revolution occurred around 10,000 B.C., which led to the
development of villages, towns, and eventually cities.
Following the agricultural revolution:
▶ There were temporary intermittent periods of economic growth.
▶ However, they were generally characterized by low average
standards of living.
▶ Wages in ancient Greece and Rome were approximately equal to
wages in Britain in the fifteenth century or France in the
seventeenth century (prior to modern economic growth).
Growth Over the Very Long Run - 2

However, over the last 150 years, living standards in wealthier

countries have increased significantly.
In an extremely small part of human history, incomes have
increased dramatically.
If the 130,000-year period, since modern humans made their first
appearance, were compressed into a single day, the era of modern
growth would have begun only in the last three minutes.
Economic Growth over the Very Long Run in Six Countries
Economic Growth over the Very Long Run in Six Countries
▶ The last figure shows estimates of per capita GDP over the last
2,000 years for six countries. Growth occurs in different places at
different times.
▶ Living standards around the world today vary dramatically.
▶ Per capita GDP in the United Kingdom and Japan is about
three-fourths that in the United States.
▶ However, modern growth first starts to appear in the United
Kingdom and then in the United States. For Argentina and China,
the ratio is one-third or less.
▶ Growth in China has occurred primarily over the last three decades.
Ghana has a per capita GDP of one-fifteenth the size of the United
States.
▶ Standards of living around the world probably differed by no more
than a factor of two or three before the year 1700.
▶ In the last three centuries, standards of living have diverged
dramatically, this is referred to as the Great Divergence.
Long run per capita income of India 1820-2015

▶ Looking over the past 150 years: from 1820 to 2015, India’s real per
capita GDP rose by more than 12-fold.
▶ Assuming this rate of growth continues, a typical college student
today (like you!) will earn a lifetime income about twice that of his
or her parents.
Rule of 70 - calculation
A construction company produces a $200,000 house using $50,000
worth of wood and steel, in addition to $50,000 of labor hours.
The value added by the construction company is
$200,000.
$150,000.
$100,000.
$50,000.
Recently, the largest share of GDP is
consumption.
government purchases.
investment.
net exports.
Under national income accounting, GDP equals
the goods produced in the economy.
the income earned in the economy.
the total purchases in the economy.
All of these choices are correct.
Thank You