ECON 001 Lecture Notes - Lecture 17: Interest Rate, Human Capital, Foreign Direct Investment
Chapter 25 Economic Growth
2 Central Questions
1. How is economic growth measured?
2. What are the causes of economic growth?
I. Measuring Economic Growth
●Use growth rate of real GDP
Let g= growth rate of real GDP
Growth rate between years 0 and 1 = g=((RGDP1 - RGDP0)/RGDP0)
Pakistan: 2016 RGDP $382B and $398B
398B - 392B
----------------------- x 100 =4.2%
392B
Use growth rate to calculate RGDP for any year in future.
RGDPn= RGDP0([1 + g]^n)
(ex) Ghana RGDP2017= $20B g= .045 (4.5%) Find RGDP2037
RGDP2037= 20B([1 + 0.045]^20)= $48.23B
Useful shortcut: “Rule of 70”
Rule of 70: number of years to double = (70/growth rate %)
(ex) Ghana: g= 0.045
Number of years to double= (70/4.5)= 15.6 years
(ex) $100 in bank
Interest rate= .01%
Number of years to double= (70/01) = 7,000 years
Real GDP may not be best measure of living standard.
Denmark ($295B)
Is India richer than Denmark?
India ($2.074 Trillion)
Real GDP per Capita (y)= Real GDP/country’s pop.
Denmark= $52,002
India= $1,582
Key Point: In comparing standard of living across countries, need to focus on real GDP per
capita/person.
Trends in GDP per capita
1. Rich countries in 1900 tend to be rich today and poor countries in 1900 tend to stay
poor.
2. Standard of living can change over time. Relatively poor countries can grow rich.
3. Differences in Economic growth rates are very small. Small differences in them is
what results in big differences in real GDP over time.
II. Productivity and Economic Growth
A. The Production Function
Recall: Production Function mathematical equation that tells us how much output will be
produced given capital + labor.
(ex) y= 10K + 20L if K =10 and L=10 then y= 300
Worker Productivity- quantity of output produced divided by each unit of labor.
Worker Productivity = (Y/L) (ex) (300/10)= 30 units per worker
Fact: Countries w/ higher worker productivities experience faster economic growth.
Difference in worker productivity -> differences in economic growth -> differences in
$/person
B. Determinants of Worker Productivity
Document Summary
2 central questions: how is economic growth measured, what are the causes of economic growth, measuring economic growth. Growth rate between years 0 and 1 = g=((rgdp1 - rgdp0)/rgdp0) Use growth rate to calculate rgdp for any year in future. Rgdpn= rgdp0([1 + g]^n) (ex) ghana rgdp2017= b g= . 045 (4. 5%) find rgdp2037. Rule of 70: number of years to double = (70/growth rate %) (ex) ghana: g= 0. 045. Number of years to double= (70/4. 5)= 15. 6 years (ex) in bank. Number of years to double= (70/01) = 7,000 years. Real gdp may not be best measure of living standard. Real gdp per capita (y)= real gdp/country"s pop. Key point: in comparing standard of living across countries, need to focus on real gdp per capita/person. Trends in gdp per capita: rich countries in 1900 tend to be rich today and poor countries in 1900 tend to stay, standard of living can change over time.
