§9 The Facts of Growth

The Facts of Growth

• A combination of business cycle and trend.
• Growth is the steady increase in aggregate output over time.
• We will now shift our focus from economic fluctuations and the determination of output in the short and medium run, to growth and the determination of output in the long run.

Measuring the Standard of Living

• We care about growth because we care about the standard of living.
• Output per person, rather than output itself, is a better variable to look at for this purpose.
• Still, tricky to compare across countries since we need to correct for variations in exchange rates and systematic differences in prices across countries.
• When comparing the standard of living across countries, we use purchasing power parity (PPP) numbers, which adjust for the differences in purchasing power of different countries.

Thinking about Growth: A Primer

• Aggregate production function:

  $$Y = F(K, N)$$

• This function depends on the state of technology.

• Constant Returns to Scale:

  $$xY = F(xK, xN)$$

• Decreasing return to capital: Increases in $K$ (with fixed $N$), lead to smaller and smaller increases in output.

• Decreasing return to labor: Increases in $N$ (with fixed $K$), lead to smaller and smaller increases in output.

• Let:

  $$x = \frac{1}{N}$$

• Then:

  $$\frac{Y}{N} = F\left(\frac{K}{N}, \frac{N}{N}\right) = F\left(\frac{K}{N}, 1\right)$$

• There is an increasing relation between capital-per-worker and output-per-worker.

• Growth per-worker comes from capital accumulation and technological progress.

— Apr 17, 2025

§9 The Facts of Growth by Lu Meng is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Permissions beyond the scope of this license may be available at About.