1. Long Run Economic Growth
Modules 37-40

2. Outline What constitutes long run economic growth?
What are the causes of long run growth?
How do we measure growth in real terms?
What are the impediments to long run growth?

3. Long Run Growth
Changes in AD and SRAS can increase GDP in the short run
But absent any change in LRAS, GDP returns to potential output

4. Figure From the Short Run to the Long Run Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

5. Long Run Growth
Long run growth is represented by a rightward shift in LRAS
Potential Output has increased
Increase in Capital, Labor or productivity

6. Figure Long-run Growth and the LRAS Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

7. Aggregate Production Function
Relationship between technology, capital and labor
At given amounts, we will have a limit to production
We can create a PPC using this

8. Aggregate PPC
Figure The Trade-off Between Investment and Consumer Goods Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Long Run Growth
So long run growth can also be represented by a shift in the Aggregate PPC
In other words, we can increase capital, labor or improve technology
In absolute terms (more of them)
Through productivity (each unit does more)

10. Productivity Increases in per unit output
Total Factor Productivity
Physical capital per worker
Human capital per worker
Technology
Increases in physical capital have diminishing marginal returns
Technology is key

11. Figure Technological Progress and Productivity Growth Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Measuring Growth
Does increasing GDP mean we are better off economically?
If population increases proportionally to GDP, we are no better off
Better measure is Real GDP per capita

13. Table U.S. Real GDP per Capita Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

14. Rule of 70 Estimate of doubling time for economy
Number of years to double =
70 divided by annual growth rate
So an economy growing at 5% will double in (70/5) or 14 years

15. Figure Incomes Around the World, 2008 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

16. Convergence Hypothesis
Differences in Real GDP per capita tend to narrow over time
True for many countries, but others seem stuck at low levels

17. Figure Success and Disappointment Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

18. Why some lag behind? Lack of capital investment
Resource-dependence
Income inequality
Lack of human capital development
Lack of political stability

19. Sustainability
Must we trade off between economic growth and response to climate change?
Not necessarily – technology/ideas are there
Innovations spurred by conservation/reducing emissions
Problem is political