Long-Term Economic Growth: Principles, Patterns, and Drivers

Technological Change, Creative Destruction, and Rising Firms

Introduction to Creative Destruction

Creative destruction refers to the process by which new innovations and technologies replace older ones, leading to the rise and fall of firms and industries. The example of Blockbuster Video illustrates how technological change can disrupt established businesses.

• Creative Destruction: The process where new products and methods replace outdated ones, often leading to the decline of established firms.

• Example: Blockbuster Video was displaced by new services like Netflix due to technological advancements in media delivery.

• Application: The same process may affect current technology firms such as Apple and Facebook in the future.

Economic Growth

Understanding Economic Growth

Economic growth is the sustained increase in a country's output of goods and services, typically measured by real GDP per capita. Growth is not guaranteed and has varied across history and countries.

• Key Question: Why do some countries achieve rapid increases in income per capita while others stagnate?

• Model of Economic Growth: Economists use models to analyze the factors that drive long-term growth.

Growth Over Time and Around the World

Historical Patterns of Growth

Significant worldwide economic growth has occurred mainly in the last two centuries, with living standards remaining largely unchanged for most of human history until the Industrial Revolution.

• Pre-Industrial Era: Minimal growth in living standards for centuries.

• Post-Industrial Revolution: Sustained increases in real GDP per capita.

Annual Growth Rates for the World Economy

Growth Rate Trends

Growth rates in real GDP per capita have varied over time, with notable increases following the Industrial Revolution.

Period	Growth Rate (%)
1 C.E. - 1000	0.00
1000-1820	0.05
1820-1870	0.62
1870-1950	1.01
1950-2000	2.20
2000-2021	1.61

• Impact of Growth Rates: Small differences in annual growth rates compound over time, leading to large differences in living standards.

• Example: Over 50 years, a 1.61% growth rate leads to a 122% increase in GDP per capita, while a 2.2% rate leads to a 197% increase.

The Industrial Revolution

Origins and Impact

The Industrial Revolution marked the beginning of sustained economic growth, driven by the application of mechanical power to production.

• Definition: The Industrial Revolution refers to the period starting around 1750 in England when mechanical power began to be widely used in production.

• Impact: Enabled countries like England, the United States, France, and Germany to experience rapid economic growth.

Why Did the Industrial Revolution Begin in England?

Institutional Changes

Economist Douglass North argues that the Glorious Revolution of 1688 was a turning point, leading to institutional changes that supported economic growth.

• Parliamentary Control: Parliament gained control over the monarchy, ensuring property rights and an independent court system.

• Incentives: These changes incentivized entrepreneurs to invest, setting the stage for the Industrial Revolution.

Key Terms and Concepts

Definitions

• Real GDP per capita: The value of goods and services produced per person, adjusted for inflation.

• Labor Productivity: The quantity of goods and services produced by one worker or one hour of work.

• Technological Change: Positive or negative changes in the ability to produce output with a given quantity of inputs.

• Capital: Machinery, equipment, and structures used in production.

Formulas and Equations

Growth Rate Calculation

• Growth Rate Formula:

$ext{Growth Rate} = rac{ ext{GDP}_{ ext{final}} - ext{GDP}_{ ext{initial}}}{ ext{GDP}_{ ext{initial}}} imes 100$

• Compounding Effect: Small annual growth rates can lead to large increases in GDP per capita over time due to compounding.

Examples and Applications

Blockbuster vs. Netflix

• Example: Blockbuster's decline and Netflix's rise illustrate the impact of technological change and creative destruction in the economy.

Industrial Revolution

• Application: The spread of mechanical power led to increased productivity and economic growth in several countries.

Summary Table: Annual Growth Rates for the World Economy

Period	Growth Rate (%)
1 C.E. - 1000	0.00
1000-1820	0.05
1820-1870	0.62
1870-1950	1.01
1950-2000	2.20
2000-2021	1.61

Additional info: These notes expand on the brief points in the slides, providing definitions, examples, and context for key macroeconomic concepts relevant to long-term economic growth.