CHAPTER 24
To have a sense of the relationship between the
annual growth rate of real GDP per capita and the
GROWTH RATE long-run change in real GDP per capita, it’s helpful to
keep in mind the Rule of 70,
LONG-RUN AGGREGATE PRODUCTION FUNCTION
ECONOMIC
Hypothetical function that shows how productivity (real G DP per
worker) depends on the quantities of physical capital per worker and
human capital per worker as well as the state of technology.
SOURCES OF LONG RUN GROWTH -
GROWTH PRODUCTIVITY
Any large increase in real GDP per capita must be the result
Diminishing returns to physical capital when, holding the amount of
human capital per worker and the state of technology
fixed, each successive increase in the amount of physical capital per
worker leads to a smaller increase in productivity.
of increased output per worker.
Growth accounting estimates the contribution of each major factor in
CONVERGENCE HYPOTHESIS the aggregate production function to economic growth.
According to the convergence
hypothesis, international
differences in real GDP per capita PHYSICAL CAPITAL HUMAN CAPITAL TECH PROGRESS
tend to narrow over time. Technological
Physical capital Human capital is progress is an
Relatively poor countries should consists of the improvement advance in the
have higher rates of growth of real human-made in labor created technical means
GDP per capita than relatively rich resources such by the education of the production
countries as buildings and and knowledge of goods and
machines.
services.
TRAGEDY OF THE COMMONS ROLE OF GOVERNMENT
DIFFERENCES IN GROWTH RATES Government policies can increase the economy’s growth
Occurs when individuals overconsume a
resource at the expense of society. rate through the following 6 channels:
Example: Fast-fashion 1. Government subsidies to infrastructure
SOLUTIONS 2. Government subsidies to education
First, make the resources private 3. Government subsidies to R&D
possessions. Secondly, framing regulations SAVINGS AND INVESTMENT EDUCATION RESEARCH AND 4. Maintaining a well-functioning Financial system
by passing laws restricting public access to SPENDING DEVELOPMENT (R&D) 5. Protection of property rights
the resources. Other solutions to the Some countries There are large 6. Political stability and good governance
tragedy of the commons include curbing differences in the Spending to create
are increasing their
overconsumption and identifying rate at which new technologies
stock of physical
sustainable alternatives countries add to and apply them to
assets much more
their human capital practical use Sustainable long-run economic growth is growth that can
rapidly than others.
PARIS AGREEMENT (2015) Foreign capital through education continue in the face of the limited supply of natural
Under the Paris Agreement of 2015, also plays an resources and with les negative impact on the
196 countries agreed to reduce their important role environment.
greenhouse gas emissions in an Economic growth, other things equal, tends to increase
effort to limit the rise in the earth’s the adverse impact of human activity on the environment,
temperature to no more than 2
SUSTAINABLE LONG-RUN including an increase in pollution
degrees centigrade. ECONOMIC GROWTH
To have a sense of the relationship between the
annual growth rate of real GDP per capita and the
GROWTH RATE long-run change in real GDP per capita, it’s helpful to
keep in mind the Rule of 70,
LONG-RUN AGGREGATE PRODUCTION FUNCTION
ECONOMIC
Hypothetical function that shows how productivity (real G DP per
worker) depends on the quantities of physical capital per worker and
human capital per worker as well as the state of technology.
SOURCES OF LONG RUN GROWTH -
GROWTH PRODUCTIVITY
Any large increase in real GDP per capita must be the result
Diminishing returns to physical capital when, holding the amount of
human capital per worker and the state of technology
fixed, each successive increase in the amount of physical capital per
worker leads to a smaller increase in productivity.
of increased output per worker.
Growth accounting estimates the contribution of each major factor in
CONVERGENCE HYPOTHESIS the aggregate production function to economic growth.
According to the convergence
hypothesis, international
differences in real GDP per capita PHYSICAL CAPITAL HUMAN CAPITAL TECH PROGRESS
tend to narrow over time. Technological
Physical capital Human capital is progress is an
Relatively poor countries should consists of the improvement advance in the
have higher rates of growth of real human-made in labor created technical means
GDP per capita than relatively rich resources such by the education of the production
countries as buildings and and knowledge of goods and
machines.
services.
TRAGEDY OF THE COMMONS ROLE OF GOVERNMENT
DIFFERENCES IN GROWTH RATES Government policies can increase the economy’s growth
Occurs when individuals overconsume a
resource at the expense of society. rate through the following 6 channels:
Example: Fast-fashion 1. Government subsidies to infrastructure
SOLUTIONS 2. Government subsidies to education
First, make the resources private 3. Government subsidies to R&D
possessions. Secondly, framing regulations SAVINGS AND INVESTMENT EDUCATION RESEARCH AND 4. Maintaining a well-functioning Financial system
by passing laws restricting public access to SPENDING DEVELOPMENT (R&D) 5. Protection of property rights
the resources. Other solutions to the Some countries There are large 6. Political stability and good governance
tragedy of the commons include curbing differences in the Spending to create
are increasing their
overconsumption and identifying rate at which new technologies
stock of physical
sustainable alternatives countries add to and apply them to
assets much more
their human capital practical use Sustainable long-run economic growth is growth that can
rapidly than others.
PARIS AGREEMENT (2015) Foreign capital through education continue in the face of the limited supply of natural
Under the Paris Agreement of 2015, also plays an resources and with les negative impact on the
196 countries agreed to reduce their important role environment.
greenhouse gas emissions in an Economic growth, other things equal, tends to increase
effort to limit the rise in the earth’s the adverse impact of human activity on the environment,
temperature to no more than 2
SUSTAINABLE LONG-RUN including an increase in pollution
degrees centigrade. ECONOMIC GROWTH
