1. Long-Run
Economic Growth

2. It is in low % but over long term low % matter a lot
The economic growth refers to a sustainable increase in economic activity.
Technically, either
Real GDP
Real GDP per capita
Real GDP per employed worker
It is in low % but over long term low % matter a lot
“rule of 70”

3. What’s good about economic growth?
Have more of everything
Material stuff
Or other stuff, too
Alleviation of poverty
Poverty hurts less if you have more
Redistribution is possible
Redistribution may be easier (helping others is a luxury)
Cost of economic growth
Opportunity cost = …
Value of today’s consumption

4. Where does economic growth come from?
Recall, Y = (factor quantity) x (factor utilization) x (factor productivity)
factor utilization is a short-run concept
The other two are long-run
Land is pretty much fixed
Capital
Increase in quantity
Increase in quality
Labour
Increase in quality (Human capital)
Technological advances

5. National accounts again: The simplest model, Y = C + I or, S = I
We implicitly endogenize interest rate in the model
Expand a bit:
Y = C + I + G
Define:
Y – T – C = private savings
T – G = public savings
Then NS = (Y-T-C) + (T-G) = Y – C – G

6. The interest rate and the loanable funds
The real interest rate an consumption
The real interest rate private savings
The real interest rate and public savings
The real interest rate and rate of return
The real interest rate and profitable investment projects
The real interest rate and investments I
The long-run equilibrium:
NS*(r*) = Y* – C – G = I*(r*)

7. Comparative statics of growth:
Higher national savings = higher growth
encourages investments
Higher investment demand = higher growth
encourages savings
Empirical support is OK

8. Neoclassical growth model (Solow) Aggregate production function
Y = AF(L,K,H)
Diminishing marginal returns
Constant returns to scale

9. What grows and how? L grows: H grows: K grows: Balanced growth:
GDP grows
GDP per capita declines
H grows:
GDP per capita grows at diminishing rate
K grows:
Balanced growth:
L goes up and K goes up
(constant return to scale ) => GDP per capita = const

10. What grows and how? Technology improves Embodied technical change
GDP grows
GDP per capita grows
Embodied technical change
Disembodied technical change (revolution!)
Solow residual A (total factor productivity TFP)
“New” growth theories
“Limits” to economic growth