Understanding Long-Term Economic Growth

1. 📌 Essentials

• Economic growth is the sustained increase in a country’s output, typically measured by GDP or GNP.
• Nominal GDP reflects current prices; real GDP adjusts for inflation using a base year.
• The GDP deflator measures overall price level changes: Nominal GDP / Real GDP.
• Dou time of income ≈ 70 / annual growth rate (%).
• Cobb-Douglas production function: $Y = K^\alpha L^{1-\alpha}$, with $0<\alpha<1$.
• Returns to scale are constant if proportional input increase leads to proportional output increase.
• Diminishing marginal productivity: each additional unit of input adds less output than the previous.
• The Solow model assumes exogenous savings, population growth, depreciation; predicts steady state.
• Steady state: when capital per worker $k^*$ and output per worker $y^*$ stop growing.
• Technological progress (A) is modeled as exogenous, driving long-term growth at rate $ \gamma).
• Total Factor Productivity (TFP): residual growth component not explained by capital or labor.
• Convergence hypothesis: poorer countries tend to grow faster, catching up to richer ones.
• Post-1950s: Western Europe and Japan experienced catch-up via capital accumulation and technology transfer.
• Growth rates have slowed since the 1970s; convergence has become less pronounced.

2. 🧩 Key Structures & Components