Chapter 3

An Overview of Long-Run
Economic Growth
3.1 Introduction
In this chapter, we learn
• some facts related to economic growth that later chapters will
seek to explain,
• how economic growth has dramatically improved welfare around
the world,
• how this growth is a relatively recent phenomenon,
• some tools used to study economic growth, including how to
calculate growth rates,
• why a “ratio scale” makes plots of per capita GDP easier to
understand.
Motivation: Why Is Economic Growth Important?

A 1 percent change in annual Hypothetical GDP Values

growth appears small, but it may

(in billions of dollars)
280

lead to large differences in the 260

240

levels of output over time. 220

200

Consider a 100-year period: 180

160

• Country A and B begin at the 140

same level of GDP ($100 billion).

120
100
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

• Country A grows at 1 percent Country A Country B

each year.
• Country B grows at 0.25 percent
each year.
3.2 Growth Over the Very Long Run
Sustained increases in standards of living are a recent phenomenon:
• The first agricultural revolution was about 10,000 years ago.
• Yet, only in the last 200–300 years has modern economic
growth appeared.
Economic growth emerges in different places at different times for
many reasons. Some results of this are:
• Standards of living have diverged dramatically.
• Per capita GDP differs remarkably around the world.
Growth Over the Very Long Run

Industrial Revolution
3.3 Modern Economic Growth
Looking over the past 150 years: from 1870 to 2018, United States
real per capita GDP rose by more than 15-fold.
Assuming this rate of growth continues, a typical college student
today will earn a lifetime income about twice that of his or her
parents.
Modern Economic Growth
The Definition of Economic Growth
Growth of per capita GDP
• The exact rate of change of per capita GDP
A percentage change
• The change between two periods divided by the value of the
variable in the initial period
Percentage change in GDP between period t and t+1:

where g bar ( ) is the associated constant growth rate.

Example: Population Growth—1
Population growth evolves the same way:

Intuitively, tomorrow’s population in time period t+1 depends on

today’s population in period t.
If equation (1) is true in time t, it also applies to time t+1. It follows
that
Population Growth—2
But, equation (1) gives us the value for
So, we can plug (1) into (2) to get

And, we could continue this process for any number of time periods,
until we recognize the pattern:
The Constant Growth Rule
The constant growth rule states that

(6)

• where
• is the time period,
• is the value of variable in time ,
• is the initial value of variable in period 0,
• is the constant growth rate.
Population over Time
The Rule of 70
The Rule of 70:
• If y grows at a rate of g percent per year, then the number of
years it takes y to double is approximately equal to 70/g.
Notes:
• Small differences in growth rates result in large differences over
time.
• The time it takes to double only depends on the growth rate and
not on the initial value.
The Ratio (Logarithmic) Scale
A plot where equally spaced tick marks on the vertical axis are
labeled consecutively with numbers that exhibit a constant ratio:
• When doubling, we want this constant ratio to be "2."
• So, on the y-axis, instead of "1, 2, 3, 4" we have "1, 2, 4, 8", or in
our case, "6, 12, 24, 48."

When plotted on a ratio scale, a variable that grows at a constant

rate will be a straight line.
Population over Time, Revisited
U.S. GDP on a Ratio Scale
On a ratio scale; if growth rates are rising, the slope will be
increasing; if the growth rate is constant, it will be a straight line.
Per capita GDP in the United States has grown at approximately 2
percent per year over the past 150 years.
• This outcome is easy to see using a ratio scale,
• Approximately linear.
Per Capita GDP in the United States, Ratio Scale
Calculating Growth Rates

Begin with the constant growth rule:

Now, solve for .

Divide both sides by 0:

Raise both sides to the 1/ power:

Subtract 1 from both sides:

The Ratio Scale in Action: Per Capita GDP since 1870
3.4 Modern Growth around the World
After World War II, growth in Germany and Japan were similar, in
that they both accelerated.
• As we see in Figure 3.6, over time, the acceleration slows.
Convergence:
• Poorer countries will grow faster to “catch up” to the level of
income in richer countries.
Argentina had accelerated growth until 1980 and then slowed
considerably.
• China and India have had the reverse pattern.
A Broad Sample of Countries
Over the period 1960–2017:
• Some countries have exhibited a negative growth rate.
• Other countries have sustained nearly 7% growth rates.
• Most countries have sustained about 2% growth rates.
Small differences in growth rates result in large differences in
standards of living.
Levels and Growth Rates of Per Capita GDP
Case Study: People versus Countries
• Since 1960: • A major reason for changes:
• The bulk of the world’s population is • Economic growth in China and
India
substantially richer.
• These two countries account for 40
• The fraction of people living in
percent of the world population.
poverty has fallen.
3.5 Some Useful Properties of Growth Rates
Growth rates of ratios, products, and powers follow several simple
rules.
Growth rates obey mathematical operations that are a level simpler
than the operation on the original variable.
• Variables divided growth rates subtracted
• Variables multiplied growth rates added
• Variable taken to a power number growth rate multiplied by
that number
Some Useful Properties of Growth Rates
Suppose two variables and have average annual growth rates of
and , respectively.
Assume also that gz is the average annual growth rate of .
Then the following rules apply:
Examples of Growth Rate Calculations
U.S. Population, GDP, and Per Capita GDP
Growth Rules in a Famous Example

Applying rules of growth rates to a Cobb

Douglas production function:
Original output equation:

Use multiplication rule to get:

Use exponent rule to get:

3.6 The Benefits and Costs of Economic Growth
The benefits of economic growth
• Improvements in health
• Higher incomes
• Increase in the variety of goods and services
Costs of economic growth include:
• Environmental problems
• Income inequality across and within countries
• Loss of certain types of jobs
Economists generally have a consensus that the benefits of
economic growth outweigh the costs.
3.7 A Long-Run Roadmap
The next few chapters examine the following:
• Chapter 4: How can we measure differences in income levels
across countries?
• Chapter 5: Develops the Solow growth model
• Chapter 6: Is human capital a driver of economic growth?
Also part of the long-run discussion is:
• Chapter 7: The labor market, wages, and unemployment in the
long run
• Chapter 8: Determinants of long-run inflation
3.8 Additional Resources
Additional Resources of interest:
• Google Scholar: www.scholar.google.com
• Robert E. Lucas Jr., "Some Macroeconomics for the 21st
Century."
• The Maddison Project:
https://www.rug.nl/ggdc/historicaldevelopment/maddison/
• CIA World Factbook:
https://www.cia.gov/library/publications/the-world-
factbook/
Clicker Question 1
Which of the following is an example of a ratio scale?
a. 1, 2, 3, 4, 5...
b. 1, 3, 6, 9, 12...
c. 1, 5, 25, 125, 625...
d. All of these choices are correct.
Clicker Question 1 – Answer
Which of the following is an example of a ratio scale?
a. 1, 2, 3, 4, 5...
b. 1, 3, 6, 9, 12...
c. 1, 5, 25, 125, 625...
d. All of these choices are correct.
Clicker Question 2
A country that, since 1980, has shown convergence to the United
States is
a. Japan.
b. South Africa.
c. China.
d. Germany.
Clicker Question 2 – Answer
A country that, since 1980, has shown convergence to the United
States is
a. Japan.
b. South Africa.
c. China.
d. Germany.
Clicker Question 3
With an average annual growth rate of 5 percent per year, per capita
income will increase by what factor over a century?
a. 16
b. 32
c. 64
d. 126
Clicker Question 3 – Answer
With an average annual growth rate of 5 percent per year, per capita
income will increase by what factor over a century?
a. 16
b. 32
c. 64
d. 126
Clicker Question 4
How quickly GDP doubles will depend on
a. the initial value of GDP.
b. the growth rate of GDP.
c. the current value of GDP.
d. All of these choices are correct.
Clicker Question 4 – Answer
How quickly GDP doubles will depend on
a. the initial value of GDP.
b. the growth rate of GDP.
c. the current value of GDP.
d. All of these choices are correct.
Clicker Question 5
Which of the following is a cost of economic growth?
a. job loss in certain sectors
b. increased income inequality
c. global warming
d. All of these are correct.
Clicker Question 5 – Answer
Which of the following is a cost of economic growth?
a. job loss in certain sectors
b. increased income inequality
c. global warming
d. All of these are correct.
Clicker Question 6

a. 0 percent.
b. 1 percent.
c. 2 percent.
d. 3 percent.
Clicker Question 6 – Answer

a. 0 percent.
b. 1 percent.
c. 2 percent.
d. 3 percent.
Clicker Question 7
After graduating college, you start a job making $40,000. Your
earnings grow at a constant growth rate of 3 percent per year. When
you retire 40 years later, you are earning approximately
a. $41,000.
b. $70,000.
c. $100,000.
d. $130,000.
Clicker Question 7 – Answer
After graduating college, you start a job making $40,000. Your
earnings grow at a constant growth rate of 3 percent per year. When
you retire 40 years later, you are earning approximately
a. $41,000.
b. $70,000.
c. $100,000.
d. $130,000.
Clicker Question 8
If a population doubles every 35 years, then the growth rate of the
population is
a. 1 percent.
b. 2 percent.
c. 3 percent.
d. 4 percent.
Clicker Question 8 – Answer
If a population doubles every 35 years, then the growth rate of the
population is
a. 1 percent.
b. 2 percent.
c. 3 percent.
d. 4 percent.
Clicker Question 9
In 1990, a country’s per capita income was $1,000. By the year
2000, it was $1,650. The average annual growth rate was
approximately 0.05.
a. true
b. false
Clicker Question 9 – Answer
In 1990, a country’s per capita income was $1,000. By the year
2000, it was $1,650. The average annual growth rate was
approximately 0.05.
a. true
b. false
Clicker Question 10
Per capita GDP can grow at a negative rate.
a. true
b. false
Clicker Question 10 – Answer
Per capita GDP can grow at a negative rate.
a. true
b. false
Clicker Question 11
If a variable is growing at a positive constant rate, when plotted on a
ratio scale, the slope of the plot will become steeper over time.
a. true
b. false
Clicker Question 11 – Answer
If a variable is growing at a positive constant rate, when plotted on a
ratio scale, the slope of the plot will become steeper over time.
a. true
b. false
Clicker Question 12
The fraction of people living in poverty has risen since 1960 as the
populations of India and China have grown substantially.
a. true
b. false
Clicker Question 12 – Answer
The fraction of people living in poverty has risen since 1960 as the
populations of India and China have grown substantially.
a. true
b. false
Clicker Question 13
If population and GDP are growing at the same rates, then per capita
GDP does not grow.
a. true
b. false
Clicker Question 13 – Answer
If population and GDP are growing at the same rates, then per capita
GDP does not grow.
a. true
b. false
Clicker Question 14
In the last 300 years, the standards of living in the richest and
poorest countries have converged.
a. true
b. false
Clicker Question 14 – Answer
In the last 300 years, the standards of living in the richest and
poorest countries have converged.
a. true
b. false
Clicker Question 15
Wages in ancient Greece and Rome were approximately equal to
wages in seventeenth-century France.
a. true
b. false
Clicker Question 15 – Answer
Wages in ancient Greece and Rome were approximately equal to
wages in seventeenth-century France.
a. true
b. false
Clicker Question 16
In 1994, your parents made an investment of $4,000. By 2015, the
investment grew to $32,000. Based on the figure below, what was
the average annual growth rate of this investment?
a. 7%
b. 10%
c. 70%
d. 100%
Clicker Question 16 - Answer
In 1994, your parents made an investment of $4,000. By 2015, the
investment grew to $32,000. Based on the figure below, what was
the average annual growth rate of this investment?
a. 7%
b. 10%
c. 70%
d. 100%
Clicker Question 17
If nominal GDP grew by 7 percent in year 2 relative to year 1, the
price level increased by 2 percent during the same period, and the
real GDP in year 1 was $1,000, what was real GDP in year 2?
a. $1,000
b. $1,020
c. $1,050
d. $1,100
Clicker Question 17 – Answer
If nominal GDP grew by 7 percent in year 2 relative to year 1, the
price level increased by 2 percent during the same period, and the
real GDP in year 1 was $1,000, what was real GDP in year 2?
a. $1,000
b. $1,020
c. $1,050
d. $1,100

Copyright © 2017 W. W. Norton & Company

Clicker Question 18
Clicker Question 18 – Answer
Clicker Question 19
According to Figure 3.7, Botswana was one of the
fastest growing countries during the 1960–2017 period.
Botswana had a level of per capita GDP approximately
equal to ______ of the U.S. level.
a.
b.
c.
d.
Clicker Question 19 – Answer
According to Figure 3.7, Botswana was one of the
fastest growing countries during the 1960–2017 period.
Botswana had a level of per capita GDP approximately
equal to ______ of the U.S. level.
a.
b.
c.
d.
Clicker Question 20
Consider two different countries, A and B. Country A has an initial
per capita GDP of $10,000 and a growth rate of 10%, Country B has
an initial per capita GDP of $40,000 and a growth rate of 2%.
Assuming the growth rates do not change, when t = 35 time periods
(years), which country will have a larger per capita GDP?
a. Country A
b. Country B
c. They are the same.
Clicker Question 20 - Answer
Consider two different countries, A and B. Country A has an initial
per capita GDP of $10,000 and a growth rate of 10%, Country B has
an initial per capita GDP of $40,000 and a growth rate of 2%.
Assuming the growth rates do not change, when t = 35 time periods
(years), which country will have a larger per capita GDP?
a. Country A
b. Country B
c. They are the same.
Clicker Question 21
Consider two different countries, A and B. Country A has growth rate of
10% and Country B has a growth rate of 2%.
The Cobb-Douglas production functions of the two countries are as
follows:

Country A: = , Country B: = .

Which country's output growth due to the capital growth rate is

greater?

a. Country A
b. Country B
c. They are the same.
Clicker Question 21 – Answer
Consider two different countries, A and B. Country A has growth rate of
10% and Country B has a growth rate of 2%.
The Cobb-Douglas production functions of the two countries are as
follows:

Country A: = , Country B: = .

Which country's output growth due to the capital growth rate is

greater?

a. Country A
b. Country B
c. They are the same.
Credits

This concludes the Lecture PowerPoint presentation for Chapter 3, An Overview of Long-Run Economic Growth, of
Macroeconomics, 5e by Charles I. Jones
For more resources, please visit http://digital.wwnorton.com/macro5

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