What is economic growth?. For most of human history, life was, as philosopher Thomas Hobbes said, “nasty, brutish and short.”

What is economic growth?


For most of human history, life was, as philosopher Thomas Hobbes said, “nasty, brutish and short.”


Before 1750, the norm was chronic hunger, malnutrition, and disease.Even the wealthy had poor diets. Life expectancy was age 30. An average British man in 1750 grew to a height of 5’6 and weighed just 130 pounds.


No one had ovens, dishwashers, microwaves, or sinks. They didn’t even have indoor kitchens.No electricity. No heat or air conditioning. No lights. No plumbing. No phones. No computers.


Economic growth is what changed that. In the past 250 years, people ate more and better, grew bigger, worked fewer hours, and lived in greater safety and comfort.


How did this happen?Technology


How did this happen?TechnologySpecialization of labor


How did this happen?TechnologySpecialization of laborHuman capital


All of these led to greater productivity – in other words, we could make more with the same resources.


Think of just the 20th Century… Airplane Penicillin DNA Computers Nuclear energy Cell phones Internet


Which one do we mean when we talk about growth? Increases in nominal GDP Increases in real GDP Increases in real per capita GDP


We can illustrate economic growth: Production possibilities curve AD/AS Model Business Cycle

Production possibilities curve

Capital goods

Consumer goods

New resources move the PPF outward, meaning the economy can have more of both goods.

Aggregate Demand & Supply Model

Price Level

Real GDP

AS1

AD1

AS2

AD2

Increases in AS and AD cause GDP to go up without inflation.

Business cycle

peak

peak

trough

expansion

recoverycontraction

Long-termupwardtrendisgrowth

What does growth mean to you?

Rule of 72

The Rule of 72 lets you calculate the time it takes for something to double.

It can be an investment or the GDP.If the growth rate is x%,Then 72/x is the time it takes to

double.

Rule of 72

If you have $500 in the bank earning 3% interest, how long until you have $1,000?

Rule of 72

If you have $500 in the bank earning 3% interest, how long until you have $1,000?

72/3 = 24It will take 24 years

Rule of 72

If you have $100 in the bank earning 10% interest, how long until you have $200?

Rule of 72

If you have $100 in the bank earning 10% interest, how long until you have $200?

72/10 = 7.27.2 years

Rule of 72

If an economy is growing at a rate of 1%, how long until GDP doubles?

Rule of 72


72 years

Rule of 72


Rule of 72


36 years

Rule of 72

You can see the importance of having a higher growth rate.

In one year, the difference may seem minimal.

Over time, it is huge.

Visual image of growth

www.gapminder.org

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What is economic growth?. For most of human history, life was, as philosopher Thomas Hobbes said, “nasty, brutish and short.”