Long-Run Economic Growth

Definition and Importance

Long-run economic growth refers to the sustained increase in a nation's productive capacity, resulting in a higher average standard of living over time. This is measured by the rise in real GDP per capita, which adjusts total output for population and price level changes.

• Long-run economic growth: The process by which rising productivity increases the average standard of living.

• Business cycle: Short-run fluctuations in economic activity, alternating between periods of expansion and recession.

• Real GDP per capita: The total value of goods and services produced per person, adjusted for inflation.

Example: The United States has experienced a nine-fold increase in real GDP per capita since the early 20th century, though not every year saw growth due to business cycles.

Economic Prosperity and Health

Economic prosperity and health are closely linked. Wealthier nations can allocate more resources to healthcare, resulting in longer life expectancies and healthier, more productive citizens.

• Growth in real GDP per capita is associated with improvements in health and lifespan.

• Life expectancy has increased steadily in developed nations over the last century.

Example: Life expectancy at birth in the United States, United Kingdom, France, and India has risen significantly from 1900 to 2023.

Calculating Growth Rates

Growth rates measure the percentage change in an economic variable, such as real GDP, over time. For short periods, average annual growth rates can be calculated by averaging yearly changes.

• Formula for annual growth rate:

• Average annual growth rate over multiple years:

Example: If real GDP was \frac{21.8 - 21.4}{21.4} \times 100 = 1.9\%$

Growth Rates over Longer Periods

For longer periods, the average growth rate can be found using the formula:

• Rule of 70: Estimates the number of years required for a variable to double at a constant growth rate.

Example: At a 5% growth rate, a variable will double in years.

Determinants of Long-Run Growth

Long-run growth in real GDP per capita depends primarily on increases in labor productivity, which is the amount of goods and services produced per worker or per hour worked.

• Labor productivity growth enables higher consumption and production per person.

• Key question: Why do Americans consume and produce more now than in 1900? Because labor productivity has increased dramatically.

Factors Affecting Labor Productivity Growth

Several factors contribute to labor productivity growth:

• Increases in capital per hour worked: More physical assets and intellectual property per worker.

• Human capital: Accumulated knowledge and skills of workers.

• Technological change: Improvements in capital or methods of production, including new technologies.

• Role of entrepreneurs: Innovators who drive technological change and economic growth.

• Property rights: Legal systems that protect ownership and enforce contracts, encouraging investment.

Example: Governments can foster growth by establishing independent courts to enforce contracts.

*Additional info: The slides provide a foundational overview of the determinants and measurement of long-run economic growth, suitable for introductory macroeconomics students.*