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CHAPTER10
The Facts
of Growth
Prepared by:
Fernando Quijano and Yvonn Quijano
Macroeconomics, 4/e
Olivier
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10-1
Growth in Rich
Countries Since 1950
Figure 10 - 1
U.S. GDP Since 1890
Aggregate U.S.
output has increased
by a factor of 39
since 1890.
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Growth in Rich
Countries Since 1950
Output per capita equals GDP divided by
population.
The standard of living depends on the evolution
of output per capita, not total output.
To compare GDP across countries, we use a
common set of prices for all countries. Adjusted
real GDP numbers are measures of purchasing
power across countries, also called purchasing
power parity (PPP) numbers.
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Growth in Rich
Countries Since 1950
The straightforward method of taking a countrys
GDP expressed in that countrys currency, and
then using the current exchange rate to express
it in terms of dollars does not always work for two
reasons:
First, exchange rates can vary a lot.
The second reason goes beyond fluctuations
in exchange rates. In general, the lower a
countrys output per capita, the lower the
prices of food and basic services in that
country.
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Growth in Rich
Countries Since 1950
Table 10-1 The Evolution of Output per Capita in Five Rich Countries
Since 1950
Annual Growth Rate
Output per Capita (%)
1950-1973
1974-2000
1950
2000
France
4.0
1.8
5,519
22,371
4.1
Japan
7.4
2.3
2,417
24,671
10.2
United Kingdom
2.4
1.8
7,641
22,188
2.9
United States
2.4
2.1
10,601
33,308
3.1
Average
4.1
2.0
6,544
25,634
3.9
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2000/1950
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Growth in Rich
Countries Since 1950
From the data in table 10-1 we conclude that:
The standard of living has increased
significantly since 1950.
Growth rates of output per capita have
decreased since the mid-1970s.
There has been convergence, that is, the
levels of output per capita across the five
countries have become closer over time.
The Construction of PPP
Numbers
The construction of variables across countries using
a common set of prices underlies PPP estimates.
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The Convergence of
Output per Capita
Figure 10 - 1
Growth Rate of GDP
per Capita Since
1950 Versus GDP
per Capita in 1950;
OECD Countries
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10-2
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Figure 10 - 3
Growth Rate of GDP
per Capita 1960-1990,
Versus GDP per
Capita in 1960 (1996
dollars); 99 countries
There is no clear
relation between the
growth rate of output
since 1960 and the
level of output per
capita in 1960.
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Figure 10 - 4
Growth Rate of GDP
per Capita 1960-1990,
Versus GDP per
Capita in 1960:
OECD, Africa, and
Asia
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10-3
Thinking About
Growth: A Primer
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Figure 1
Happiness and
Output per
Capita Across
Countries
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Table 1
1975
1996
Very happy
32
31
Pretty happy
55
58
13
11
Table 2
Income Level
Bottom Quarter
Very happy
37
16
Pretty happy
57
53
31
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Y F (K ,N )
Y = aggregate output.
K = capitalthe sum of all the machines, plants,
and office buildings in the economy.
N = laborthe number of workers in the
economy.
The function F, tells us how much output is
produced for given quantities of capital and labor.
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2 Y F ( 2 K ,2 N )
Or more generally, for any number
x,
xY F (xK ,xN )
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Y
K N
K
F
, F
,1
N
N N
N
The amount of output per worker, Y/N depends
on the amount of capital per worker, K/N.
As capital per worker increases, so does output
per worker.
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Increases in capital
per worker lead to
smaller and smaller
increases in output per
worker.
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Figure 10 - 6
The Effects of an
Improvement in the
State of Technology
An improvement in the
state of technology
shifts the production
function up, leading to
an increase in output
per worker for a given
level of capital per
worker.
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Y
K N
K
F
, F
,1
N N
N
N
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Y
K N
K
F
, F
,1
N N
N
N
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Key Terms
growth
logarithmic scale
output per capita
standard of living
purchasing power, purchasing
power parity (PPP),
convergence
Malthusian era
leapfrogging
four tigers
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