Chapter 10

The Facts of Growth

The Long Run

The Facts of Growth The Long Run

Short and Medium Term:

Fluctuations of output

The long run:

The growth in output

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Annual Growth Rate
Output per Capita (%)
1950-1973

Real Output per Capita

(1992 dollars)

1973-1998

1950

1998

Ratio of Real Ouput

Per Capita
1998/1950

France

4.2

1.6

5,150

19,158

3.7

Germany

4.9

1.8

4,356

20,059

4.6

Japan

8.1

2.5

1,820

19,907

10.9

United Kingdom

2.5

1.9

6,870

19,005

2.8

United States

2.2

1.5

11,170

25,890

2.3

Average

4.4

1.9

5,872

20,804

3.5

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Constructing
ConstructingOutput
OutputNumbers
Numbers

Output Per Capita =

Output
Population

Purchasing Power Parity: Adjusts for differences in

exchange rates and
prices

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Observations
Observations
Strong growth 1950-1998
Growth rates have decreased since the mid 1970s
1950-1978 4.4% (GDP/capita doubles every 16 years)
1973-1998 1.9% (GDP/capita doubles every 37 years)
Convergence in output/capita across countries

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Convergence
Convergencein
inOutput/Capita
Output/Capita

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

What
Whatdo
doyou
youthink
think
Could the finding of convergence be
influenced by the way the countries are
selected?

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

AABroader
BroaderLook
LookAcross
Across Time
Timeand
andSpace
Space
Looking across two millennia
From the end of the Roman Empire to 1500, no
output per capita growth in Europe
1500-1700 -- Small growth in output per capita
(0.1%/year and 0.2%/year 1700 to 1820)
1820-1950 -- Modest growth (U.S. = 1.5%)
The high-growth of the 1950s and 1960s is unusual
Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

AABroader
BroaderLook
LookAcross
Across Time
Timeand
andSpace
Space
Looking across two millennia (Continued)
1st Millennium to the 15th century, China had the
highest output/capita
Leaders in output/capita change frequently:
Italy
Netherlands
U.K.

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The
TheReality
Realityof
ofGrowth:
Growth: AAWorkingmans
WorkingmansBudget
Budgetin
in1851
1851
Item of Expenditure
Butchers meat (2 lb a day)
Flour (6 1/2 lb a year)
Butter (2 lb a week)
Potatoes (2 pk a week)
Sugar (4 lb a week)
Coffee and tea
Milk
Salt, pepper, vinegar, starch, soap, yeast, cheese, eggs
Total expenditure for food
Rent
Coal (3 tons a year)
Charcoal, chips, matches
Candles and oil
Household articles (wear, tear, and breakage)
Bedclothes and bedding
Wearing apparel
Newspapers
Total expenditures other than food
Blanchard: Macroeconomics

Amount
(Dollars)

Percent of
Total

72.80
32.50
32.50
26.00
16.64
13.00
7.28
20.80
221.52
156.00
15.00
5.00
7.28
13.00
10.40
104.00
6.24
316.92

13.5
6.0
6.0
4.8
3.0
2.4
1.4
3.9
41.0
29.0
2.8
0.9
1.4
2.4
1.9
19.3
1.2
58.9

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Looking
LookingAcross
AcrossCountries
CountriesConvergence
ConvergenceNot
Notthe
theRule
Rule

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Looking
LookingAcross
AcrossCountries
CountriesAACloser
CloserLook
Look

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Looking
LookingAcross
AcrossCountries
CountriesAACloser
CloserLook
Look

Three Conclusions:

OECD countries are converging

Asian countries are converging
African countries are not converging

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

AASummary
Summary
1. Growth is not a historical necessity
2. Convergence of OECD countries to the
U.S. may be the prelude to leapfrogging
3. The rapid post WWII growth was atypical

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Thinking
ThinkingAbout
AboutGrowth:
Growth: AAPrimer
Primer (The
(The Solow
Solow
Model)
Model)
The Aggregate Production Function
Y = F (K, N)
Y = Aggregate Output
K = Capital
N = Labor

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The Aggregate Production Function
Y = F (K, N)

F: Depends on technology

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Returns
Returnsto
toScale
Scaleand
and Returns
Returnsto
to Factors
Factors
Constant returns to scale:

2Y = F(2K,2N)
xY = F(xK,xN)

Decreasing returns to factors (capital & labor):

Increases in K and N lead to smaller and
smaller increases in output

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Output
Output and
andCapital
Capital per
perworker
worker

xY f ( xK , xN )
1
x
N
Y
K
F ( ,1)
n
n

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Output
Output and
andCapital
Capital per
perworker
worker

Y
output/wor ker
n
K
capital/wo rker
n
Y
K
F(K,1) : Y depends on
N
n

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

Output
Output and
andCapital
Capital per
perworker
worker
Y/N = (K/N, 1)

Output per worker, Y/N

D
C

Capital per worker, K/N

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The
TheSources
Sourcesof
of Growth
Growth

Output per worker, Y/N

An improvement in technology shifts

the production function up
F(K/N, 1)

F(K/N, 1)

A
Capital per worker, K/N

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The
TheSources
Sourcesof
of Growth
Growth
Increases in Y occur when technology

shifts the production functions

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The
TheSources
Sourcesof
of Growth
Growth
Capital Accumulation
Cannot sustain growth because of
diminishing returns to capital
Capital accumulation requires savings,
therefore, what is the appropriate savings
rate?

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

The Facts of Growth The Long Run

The
TheSources
Sourcesof
of Growth
Growth
Technological Progress
Required for sustained growth
What determines the rate of technological
progress?

Blanchard: Macroeconomics

Chapter 10: The Facts of Growth The Long Run

End of Chapter
The Facts of Growth
The Long Run