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Econ520
January 5, 2016
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U.S. Economic Growth
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What Is a Growth Rate?
x (t + 1) − x (t)
g= (1)
x (t)
I Or:
x (t + 1) = (1 + g) x (t) (2)
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Growth rates over multiple periods
I Example:
I GDP per capita grows at 1.8% per year.
I y2002 = 30, 000
I y2003 = 1.018 · $30, 000 = $30, 540.
I y2003 = 1.018y2002 = 1.0182 y2001 .
I Example:
I In 50 years, y grows by 1.01850 = 2.44.
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Calculating the average growth rate
I The average growth rate answers the question:
I Which constant growth rate would change yt to yt+n in n years?
I Start from
yt+n = yt · (1 + g)n (4)
and solve for g.
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Large long-term effects of small changes in growth
I How much lower would U.S. GDP be today, had it grown 0.5%
more slowly?
I The answer:
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Logs: An easier calculation
I Average growth rate:
yt+n = yt · (1 + g)n (7)
I In logs:
ln (yt+n ) = ln (yt ) + n ln (1 + g) (8)
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Important growth rate rules
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How to plot growing variables?
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Log plots
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Log plots
yt+1 = yt (1 + gt ) (12)
ln (yt+1 ) = ln (yt ) + gt (13)
I Now the plot is not linear, but the slope is still the growth rate.
I An important feature for reading log graphs: log (y) increases
by 0.1 means that y roughly rises by 10%
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Logarithmic scale
0
0 10 20 30 40 50 60 70 80 90 100
t
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U.S. GDP: Log scale
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Examples
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