Macroeconomics - CH24 Long-Run Economic Growth

The real GDP per capita is the real GDP divided by the population size. We focus on real GDP per capita because we want to isolate the effect of changes in the population.

The Rule of 70 is a mathematical formula that tells us how long it takes real GDP per capita, or any other variable that grows gradually over time, to double.

Rising productivity

The term labor productivity, or productivity for short, is used to refer either to output per worker or, in some cases, to output per hour. For the economy as a whole, productivity – output per worker – is simply real GDP divided by the number of people working.

1. Increase in Physical Capital (better equipment)
2. Increase in Human Capital (better education and knowledge)
3. Technological Progress (better technologies)

The aggregate production function (or GDP per worker) shows how productivity depends on the quantities of physical capital per worker, human capital per worker and the state of technology. It allows economists to disentangle the effects of these three factors on overall productivity.

Diminishing returns to physical capital is an “other things equal” phenomenon: additional amounts of physical capital are less productive when the amount of human capital per worker and the technology are held fixed! Diminishing returns may disappear if we increase the amount of human capital per worker, or improve the technology, or both at the same time the amount of physical capital per worker is increased.

That is, when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads a smaller increase in productivity.

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