Chapter 10: The Facts of Growth – The Long Run Slide #1Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Chapter 10: The Facts of Growth – The Long Run Slide #2Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run(Real GDP at Purchasing Power Parity)(Real GDP at Purchasing Power Parity)

Annual Growth Rate Real Output per CapitaOutput per Capita (%) (1992 dollars)

Ratio of Real OuputPer Capita

1950-1973 1973-1998 1950 1998 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

Chapter 10: The Facts of Growth – The Long Run Slide #3Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

ObservationsObservations

• Strong growth 1950-1998

• Growth rates have decreased since the mid 1970s1950-1978 4.4% (GDP/capita doubles every 16 years)

1973-1998 1.9% (GDP/capita doubles every 37 years)

• Convergence in output/capita across countries???

Chapter 10: The Facts of Growth – The Long Run Slide #4Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Convergence in Output/Capita – The OECDConvergence in Output/Capita – The OECD

Chapter 10: The Facts of Growth – The Long Run Slide #5Blanchard: Macroeconomics

The Facts of Growth – The The Facts of Growth – The VeryVery Long Run Long Run

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 unusualLeaders in output/capita change frequently:

Italy Netherlands U.K. US

Chapter 10: The Facts of Growth – The Long Run Slide #6Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Looking Across Lots of Countries – Convergence ???Looking Across Lots of Countries – Convergence ???

Chapter 10: The Facts of Growth – The Long Run Slide #7Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Looking Across Countries – A Closer LookLooking Across Countries – A Closer Look

Chapter 10: The Facts of Growth – The Long Run Slide #8Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

A SummaryA Summary

1. Growth is not a historical necessityThere’s been lots of stagnation and decline

2. Convergence of OECD countries to the U.S. may be the prelude to leapfrogging

3. The rapid post WWII growth was atypical

Chapter 10: The Facts of Growth – The Long Run Slide #9Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Thinking About Growth: A Primer (The Solow Model)Thinking About Growth: A Primer (The Solow Model)

The Aggregate Production Function

Y = F (K, N)

Y = Aggregate OutputK = CapitalN = Labor

F: Depends on technology

Chapter 10: The Facts of Growth – The Long Run Slide #10Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Returns to Scale and Returns to FactorsReturns to Scale and Returns to Factors

Constant returns to scale: 2Y = F(2K,2N)xY = F(xK,xN)

Double all inputs Double output

Decreasing returns to factors (capital & labor):

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

•Diminishing Marginal Productivity of Labor (MPL)

•Diminishing Marginal Productivity of Kapital (MPK)

Chapter 10: The Facts of Growth – The Long Run Slide #11Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Output and Capital per worker: Y/N and K/NOutput and Capital per worker: Y/N and K/N

)1,(

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Chapter 10: The Facts of Growth – The Long Run Slide #12Blanchard: Macroeconomics

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

Output and Capital per worker: Diminishing MPLOutput and Capital per worker: Diminishing MPLO

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ork

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Capital per worker, K/N

Y/N = (K/N, 1)

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Chapter 10: The Facts of Growth – The Long Run Slide #13Blanchard: Macroeconomics

F(K/N, 1)

F(K/N, 1)

The Facts of Growth – The Long RunThe Facts of Growth – The Long Run

The Sources of GrowthThe Sources of Growth

• An improvement in technology shifts the production function up

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