1. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #1 The Facts of Growth – The Long Run

2. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #2 The Facts of Growth – The Long Run (Real GDP at Purchasing Power Parity) Annual Growth RateReal Output per Capita Output per Capita (%)(1992 dollars) Ratio of Real Ouput Per Capita 1950-19731973-199819501998 1998/1950 France4.21.65,15019,1583.7 Germany4.91.84,35620,0594.6 Japan8.12.51,82019,90710.9 United Kingdom2.51.96,87019,0052.8 United States2.21.511,17025,8902.3 Average4.41.95,87220,8043.5

3. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #3 The Facts of Growth – The Long Run Observations Strong growth 1950-1998 Growth rates have decreased since the mid 1970s 1950-1978 4.4% (GDP/capita doubles every 16 years) 1973-1998 1.9% (GDP/capita doubles every 37 years) Convergence in output/capita across countries???

4. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #4 The Facts of Growth – The Long Run Convergence in Output/Capita – The OECD

5. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #5 The Facts of Growth – The Very Long Run Looking across two millennia From the end of the Roman Empire to 1500, no output per capita growth in Europe 1500-1700 -- Small growth in output per capita (0.1%/year and 0.2%/year 1700 to 1820) 1820-1950 -- Modest growth (U.S. = 1.5%) The high-growth of the 1950s and 1960s is unusual Leaders in output/capita change frequently: Italy  Netherlands  U.K.  US

6. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #6 The Facts of Growth – The Long Run Looking Across Lots of Countries – Convergence ???

7. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #7 The Facts of Growth – The Long Run Looking Across Countries – A Closer Look

8. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #8 The Facts of Growth – The Long Run A Summary 1.Growth is not a historical necessity There’s been lots of stagnation and decline 2.Convergence of OECD countries to the U.S. may be the prelude to leapfrogging 3.The rapid post WWII growth was atypical

9. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #9 The Facts of Growth – The Long Run Thinking About Growth: A Primer (The Solow Model) The Aggregate Production Function Y = F (K, N) Y = Aggregate Output K = Capital N = Labor F: Depends on technology

10. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #10 The Facts of Growth – The Long Run Returns to Scale and Returns to Factors Constant returns to scale:2Y = F(2K,2N) xY = F(xK,xN) Double all inputs  Double output Decreasing returns to factors (capital & labor): Increases in K and N lead to smaller and smaller increases in output Diminishing Marginal Productivity of Labor (MPL) Diminishing Marginal Productivity of Kapital (MPK)

11. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #11 The Facts of Growth – The Long Run Output and Capital per worker: Y/N and K/N

12. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #12 The Facts of Growth – The Long Run Output and Capital per worker: Diminishing MPL Output per worker, Y/N Capital per worker, K/N Y/N = (K/N, 1) A A´ B´ B C´ C D´ D

13. Chapter 10: The Facts of Growth – The Long RunBlanchard: Macroeconomics Slide #13 F(K/N, 1) The Facts of Growth – The Long Run The Sources of Growth An improvement in technology shifts the production function up Output per worker, Y/N Capital per worker, K/N A A´ B´