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What is economic growth?

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For most of human history, life was, as philosopher Thomas Hobbes said, “nasty, brutish and short.”

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What is economic growth? Before 1750, the norm was chronic hunger, malnutrition, and disease. Even the wealthy had poor diets. Life expectancy was age 30. An average British man in 1750 grew to a height of 5’6 and weighed just 130 pounds.

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What is economic growth? No one had ovens, dishwashers, microwaves, or sinks. They didn’t even have indoor kitchens. No electricity. No heat or air conditioning. No lights. No plumbing. No phones. No computers.

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What is economic growth? Economic growth is what changed that. In the past 250 years, people ate more and better, grew bigger, worked fewer hours, and lived in greater safety and comfort.

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What is economic growth? How did this happen? Technology

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What is economic growth? How did this happen? Technology Specialization of labor

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What is economic growth? How did this happen? Technology Specialization of labor Human capital

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What is economic growth? All of these led to greater productivity – in other words, we could make more with the same resources.

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What is economic growth? Think of just the 20 th Century… Airplane Penicillin DNA Computers Nuclear energy Cell phones Internet

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What is economic growth? Which one do we mean when we talk about growth? Increases in nominal GDP Increases in real GDP Increases in real per capita GDP

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What is economic growth? We can illustrate economic growth: Production possibilities curve AD/AS Model Business Cycle

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Production possibilities curve Capital goods Consumer goods New resources move the PPF outward, meaning the economy can have more of both goods.

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Aggregate Demand & Supply Model Price Level Real GDP AS 1 AD 1 AS 2 AD 2 Increases in AS and AD cause GDP to go up without inflation.

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Business cycle peak trough expansion recovery contraction Long- term upward trend is growth

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What does growth mean to you?

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Rule of 72 The Rule of 72 lets you calculate the time it takes for something to double. It can be an investment or the GDP. If the growth rate is x%, Then 72/x is the time it takes to double.

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Rule of 72 If you have $500 in the bank earning 3% interest, how long until you have $1,000?

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Rule of 72 If you have $500 in the bank earning 3% interest, how long until you have $1,000? 72/3 = 24 It will take 24 years

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Rule of 72 If you have $100 in the bank earning 10% interest, how long until you have $200?

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Rule of 72 If you have $100 in the bank earning 10% interest, how long until you have $200? 72/10 = 7.2 7.2 years

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Rule of 72 If an economy is growing at a rate of 1%, how long until GDP doubles?

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Rule of 72 If an economy is growing at a rate of 1%, how long until GDP doubles? 72 years

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Rule of 72 If an economy is growing at a rate of 2%, how long until GDP doubles?

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Rule of 72 If an economy is growing at a rate of 2%, how long until GDP doubles? 36 years

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Rule of 72 You can see the importance of having a higher growth rate. In one year, the difference may seem minimal. Over time, it is huge.

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Visual image of growth www.gapminder.org

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