II. THE LONG RUN
Chapter 3:
Overview of Economic Growth

3.1 Introduction
• In this chapter, we learn:
– Some facts related to economic growth that later chapters will seek to explain.
– Some tools used to study economic growth, including how to calculate growth rates. 3.2 Growth over the 

Very Long Run
• Sustained increases in standards of living are a recent phenomenon.
• As a result per capita GDP differs remarkably across countries.

• The Great Divergence: the period from
1700 to today
• Before 1700
– Per capita GDP across countries differed only by a factor of two or three.

• Today
– Fanning out of per capita GDP
– Cross-country it differs by a factor of 50!

• From 1870 to 2012, US per capita real
GDP rose by a factor of 17.

3.3 Modern Economic Growth

The Definition of Economic Growth
• We define the rate of economic growth between two periods as the percent change in per capita
GDP (in real terms) between those periods.

• Percentage change in GDP between period t and and t + 1

“new”
GPD

“old”
GPD

• Say per capita real GDP was $20,000 in year 1990.
We know it increased by 10% (10/100 = 0.1) between 1990 and 2000. What is the 2000 value?

• Applying the growth rate to find next period’s value:

growth rate • Suppose y grows 2% each year.
– NB: That is an accumulated 49% over 20 years.

• The constant growth rule: time period

variable value in period t

initial variable value in period
0

constant growth rate

Example

• The world’s population is now 7.24 billion people (July 2014)
• Suppose population grows at a constant rate of 1% per year
• What do you project the world’s population to be in 10 years?
– 8 billion

• And in 30 years?

The Rule of 70 and the Ratio Scale

• The Rule of 70
– If y grows at a rate of g percent