Why growth matters
Small differences in growth rates, sustained over decades, create enormous differences in living standards between countries.
Economic growth
Economic growth is a sustained increase in real GDP per person. It is the main reason average living standards today are many times higher than two centuries ago. Before about 1800, average incomes worldwide grew very slowly for thousands of years; since the Industrial Revolution, many countries have seen steady growth.
The power of compounding
Growth compounds: each year's growth builds on the last. The rule of 70 says a quantity growing at g% a year doubles in roughly 70/g years. At 1% growth, incomes double in 70 years; at 2%, in 35 years; at 7%, in just 10 years.
Worked example
Two countries start with income per person of 10,000 dollars. Country A grows at 1% a year, Country B at 3%. After 35 years, A's income is about 14,200 dollars, while B's is about 28,100 dollars, nearly double A's. A 2-point difference in growth, sustained for one generation, transforms relative living standards.
Growth around the world
Growth experiences differ hugely. South Korea's income per person rose from levels similar to many poor countries in 1960 to rich-country levels by the 2000s. China grew around 9-10% a year for three decades after 1978. Some countries, especially in sub-Saharan Africa until the 2000s, saw little growth for long periods.
Growth and poverty
Rapid growth has been the most powerful force for reducing poverty. According to the World Bank, the share of the world's population living in extreme poverty fell from over a third in 1990 to under a tenth by the late 2010s, largely due to growth in China, India, and other Asian countries. Progress stalled somewhat with the pandemic.
Measuring productivity
Long-run growth in income per person comes mainly from rising labour productivity: output per worker or per hour worked. Productivity rises when workers have more and better capital, more skills (human capital), and better technology and organisation.
Growth accounting
Growth accounting divides output growth into contributions from more labour, more capital, and a residual called total factor productivity (TFP), which captures technology and efficiency. Robert Solow found that most US growth in the early 20th century came from TFP rather than simply adding more capital or labour.
Costs of growth
Growth can bring environmental damage, resource depletion, and disruption to communities, and its benefits are not always shared evenly. Debates about 'green growth' focus on whether economies can keep growing while cutting emissions; several rich countries have reduced emissions while GDP grew, though not yet fast enough for climate goals.
Key takeaways
Growth is a sustained rise in real GDP per person and has transformed living standards since about 1800. The rule of 70 shows doubling times; small growth differences compound into large gaps. Growth has driven large falls in extreme poverty. Productivity, from capital, skills, and technology, drives long-run growth; growth accounting separates these contributions. Growth also has environmental and distributional costs.
Flashcard
Sustained rise in real GDP per person
Check your understanding
Using the rule of 70, how long does it take an economy growing at 5% a year to double its income?