Long-Run Economic Growth: Determinants, Patterns, and Policy

Long-Run Economic Growth

Introduction

Economic growth is a central topic in macroeconomics, as it determines the long-run improvement in living standards and health outcomes. Higher national income is closely linked to better health, lower child mortality, and increased life expectancy. The relationship between GDP per capita and survival rates of newborns illustrates the importance of economic growth for societal well-being.

• Economic growth refers to the sustained increase in a country's output of goods and services over time.

• Health and wealth are positively correlated: richer countries tend to have lower child mortality rates.

• Example: In 2023, malaria caused 597,000 deaths, mostly among African children. Preventing these deaths requires economic growth to improve health infrastructure.

Incomes and Growth Around the World

Patterns of GDP per Capita and Growth Rates

There are significant differences in income and growth rates across countries. These differences explain the variation in living standards worldwide.

• GDP per capita measures the average income per person in a country.

• Growth rates indicate how quickly a country's income is increasing over time.

• Countries like Singapore and the United States have high GDP per capita, while countries like Rwanda and Chad have much lower levels.

Country	GDP per capita, 2024	Growth Rate (1990–2024)
China	$23,846	8.2%
India	$9,817	4.5%
Rwanda	$3,265	4.1%
Singapore	$132,570	3.3%
Philippines	$10,376	2.5%
Columbia	$18,504	1.9%
United States	$75,491	1.6%
Chad	$2,606	1.5%
New Zealand	$48,163	1.4%
Brazil	$19,648	1.3%
United Kingdom	$52,518	1.3%
Spain	$48,373	1.3%
Russia	$41,705	1.2%
Japan	$46,097	0.8%

Additional info: Table reconstructed from slide images and text. Growth rates are annualized averages.

Key Questions in Economic Growth

• Why are some countries richer than others?

• Why do some countries grow quickly while others remain in poverty?

• What policies can help raise growth rates and long-run living standards?

Productivity: The Engine of Growth

Definition and Measurement

Productivity is the most important determinant of a country's standard of living. It measures the efficiency with which inputs are converted into outputs.

• Productivity: The average quantity of goods and services produced per unit of labor input.

• Formula: $\text{Productivity} = \frac{Y}{L}$ where $Y$ = real GDP (output produced), $L$ = quantity of labor.

• Higher productivity leads to higher incomes and improved living standards.

Why Productivity Is So Important

• When workers are productive, real GDP is large and incomes are high.

• Rapid productivity growth leads to rapid improvements in living standards.

• Understanding the determinants of productivity is crucial for promoting economic growth.

Determinants of Productivity

Physical Capital per Worker

Physical capital refers to the stock of equipment and structures used to produce goods and services.

• Physical capital (K): Machines, equipment, and buildings.

• Formula: $\frac{K}{L}$ where $K$ = capital, $L$ = labor.

• Increasing capital per worker raises productivity.

• Example: A factory with modern machinery can produce more output per worker than one with outdated equipment.

Human Capital per Worker

Human capital is the knowledge and skills acquired by workers through education, training, and experience.

• Human capital (H): Education, skills, and experience.

• Formula: $\frac{H}{L}$ where $H$ = human capital, $L$ = labor.

• Higher human capital per worker increases productivity.

• Example: Workers with advanced degrees or specialized training can perform tasks more efficiently.

Technological Knowledge

Technological knowledge encompasses society's understanding of the best ways to produce goods and services.

• Technological progress: Any advance in knowledge that boosts productivity.

• Examples include new inventions, improved production processes, and better management techniques.

• Technological knowledge is often a public good, meaning it can be shared and used by many.

Economic Growth and Public Policy

Saving and Investment

Increasing the stock of physical capital requires investment, which is funded by saving. There is a tradeoff between current consumption and future growth.

• Producing more capital goods means fewer resources for current consumption.

• Higher saving rates fund investment, leading to greater future productivity.

• Example: A country that saves more can build more factories and infrastructure, raising future output.

Investment from Abroad

Foreign investment can help countries increase their capital stock and productivity.

• Foreign direct investment (FDI): Capital investment owned and operated by a foreign entity.

• Foreign portfolio investment: Capital investment financed with foreign money but operated by domestic residents.

• International organizations like the World Bank and IMF facilitate investment in developing countries.

Education

Government policies that promote education increase human capital and productivity.

• Public schools and subsidized loans make education more accessible.

• Each additional year of schooling raises a worker's wage by about 10% in the U.S.

• Tradeoff: Time spent in school means sacrificing current income for higher future earnings.

Institutions and Incentives

Institutions are the rules and norms that shape economic incentives and behavior.

• Property rights: Secure ownership encourages investment.

• Honest government: Reduces corruption and increases efficiency.

• Political stability: Promotes long-term planning and investment.

• Legal system: Enforces contracts and protects rights.

Least Corrupt Countries (2024)	Most Corrupt Countries (2022)
Denmark	South Sudan
Finland	Somalia
Singapore	Venezuela
New Zealand	Syria
Luxembourg	Yemen
Norway	Libya
Switzerland	Equatorial Guinea
Sweden	Nicaragua
Netherlands	Sudan
Australia	Sudan

Additional info: Table reconstructed from slide images and text. Corruption Perception Index data.

Free Trade

Trade policies significantly affect economic growth. Outward-oriented policies promote integration with the world economy and foster growth, while inward-oriented policies often hinder it.

• Outward-oriented policies: Eliminate trade restrictions and encourage foreign investment.

• Inward-oriented policies: Use tariffs and investment limits to protect domestic industries.

• Countries with outward-oriented policies (e.g., South Korea, Singapore, Taiwan) have experienced rapid growth.

• Countries with inward-oriented policies (e.g., Argentina in the 20th century) have generally failed to achieve sustained growth.

Research and Development (R&D)

Technological progress is the main driver of long-run increases in living standards. Knowledge is a public good that can be shared to boost productivity.

• Policies to promote R&D include patent laws, tax incentives, and grants for basic research.

• Example: Government funding for university research can lead to new technologies that benefit the entire economy.

Summary and Discussion

• Long-run economic growth depends on productivity, which is determined by physical capital, human capital, technological knowledge, and sound institutions.

• Public policy can influence growth through investment, education, trade, and support for R&D.

• Key questions for policymakers include how to best promote growth and improve living standards, especially in poor countries.