Chapter 10

• Economic Growth
• Sections in Chapter 10

  • Economic Growth Facts
  • The Ingredients of Economic Growth
  • The Analytics of Economic Growth
  • Public Policy: Why Institutions Matter for Growth
• Learn how economies have grown over time: Since 1 million B.C., Over the past two centuries
• World GDP over the Last Two Millennia


  • https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia

  
• Economic growth since 1 million B.C.


  • There was very little progress for most of human history. Hand-to-mouth as hunters and gatherers. Transitioned to farming, but starvation and malnutrition were still common. From 1 million B.C. until 1200 A.D. GDP per person was around $200 per year.
• Economic growth since 1 million B.C.

  • At the start of the 1800s, world real GDP per person was roughly $400 per year.
• World GDP 1200-1700


  • https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia
• Economic growth over the past two centuries

  • Agricultural advances and the Industrial Revolution created more food, and acted as an engine of economic growth: Crop rotation, higher-yield crops, new farm equipment, transportation infrastructure meant fewer resources need to grow food. Revolutionary new products: steam engine, sewing machine, light bulb, telephone. People can produce more than ever before!
• Economic growth over the past two centuries

  • From 1200 to 1800, it took 600 years for worldwide real GDP to double, but then growth exploded: More than doubled by 1900, Doubled again by 1950, Doubled again by 1975, Doubled again by early 2000s.

  
• World GDP 1820-2015


  • https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia
• Economic growth over the past 200 years


  • Economic growth doesn't just mean you consume more stuff. Enables you to live and thrive! Fewer people go hungry. More sanitary conditions. Invest in education and health. Longer life expectancy. But the agricultural and industrial revolutions didn't lead to economic growth everywhere. Small differences can have big effects.
• Growth disasters and miracles

  • Spain was a sixteenth century powerhouse, but between 1600 and 1850 their economy barely grew. 1950's real GDP per person was only 2.5× larger than 400 years earlier. Rebounded in second half of 1900s. Argentina was only of the richest countries in the world at the start of the 1900s, but then growth stalled. Fell behind as other countries grew.
• GDP Growth

  • https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CA-CN-GB-US-IN

  
• The Variety of Growth Experiences

  • Brazil, Japan, China, Mexico, Germany, Indonesia, Canada, India, United States, Pakistan, Argentina, Bangladesh, United Kingdom
• Simple Average vs. Compound Annual Growth Rate (CAGR)

  Simple average is the average return of all the periodic returns. CAGR is the annualized return on an investment over time, taking into account the timing of past capital gains or earnings reinvested.

  
• Using the CAGR, what is the growth rate in real GDP from 1870 ($3,282) to 2014 ($56,307)?

  
• Real Quarterly GDP Growth (%) Canada


  • https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia

  
• Be able to identify the benefits incurred by people from economic growth and understand the period of time of low vs high growth in the world
• Uncover the ingredients for economic growth: The production function, Three ingredients, Technological progress
• Production function


  The methods by which inputs are transformed into output, which determines the total production that's possible with a given set of ingredients.
• Ingredients of the production function

  • Labour (L), Human capital (H), Physical capital (K)
• Output is a function of inputs: Y = f(L, H, K)
• Labour and Total Hours Worked

  • The total quantity of labour input is the sum of all hours worked across the whole economy. This sum reflects four factors: population size, working-age fraction of the population, share of working-age people who choose to work, how many hours each worker puts in.
• Physical capital


  Tools, machines, factories, government provided infrastructure like roads, electricity networks, and telecommunications
• Recipes for transforming inputs into output


  Discovering new and more efficient production techniques allows us to transform a given quantity of inputs into even more output

  
• Output


  A function of inputs
• Ingredients of economic growth

  • Labour input
  • Human capital
  • Physical capital
  • Technological progress
• Labour input


  • Number of workers to transform raw materials into products and services that people want to buy
• Human capital


  • The skills and knowledge of people developed through education, practice, and training
• Physical capital


  • The total amount of tools, machinery, and structures that can be used in the production of goods and services
• Technological progress


  • New methods for using existing resources to produce more valuable output
• Constant returns to scale: Increasing all inputs by some proportion will cause output to rise by the same proportion
• Replication argument: If you want to double the output of your factory, simply replicate everything you're already doing to produce twice the output
• Diminishing returns to capital

  If you only double your physical capital, and don't change the number of workers, then you will produce more, but you won't produce twice as much
• Catch-up growth


  The rapid growth that occurs when a relatively poor country invests in its physical capital
• Depreciation


  The decline in capital due to wear and tear, obsolescence, accidental damage, and aging
• The capital stock will grow as long as investment outpaces depreciation
• Physical capital per worker will eventually stop growing due to diminishing returns and rising depreciation
• Capital accumulation can't sustain long-term economic growth. When new investment in capital stock merely offsets depreciation, then capital stock reaches a steady state with no growth in output unless technology changes
• Technological progress moves the production function upward, allowing us to produce more output per person with any given amount of capital