A nation's ability to provide improving standards of living for its people depends crucially on its long-run rate of economic growth.
Over a long period of time, even an apparently small difference in the rate of economic growth can translate into a large difference in the income of the average person.[89]
Compare, for example, the historical experiences of the United Kingdom and Japan.
In 1870, real GDP per person was almost four times as large in the United Kingdom as in Japan, as the data on national growth performances in Table 6.1 show. The UK economy did not stand still after 1870. Over the next 148 years, UK real GDP per person grew by 1.3% per year so that by 2018 the real income of the average Briton was more than six times as great as it had been in 1870. However, during the same period, Japanese real GDP per person grew at a rate of 2.2% per year, reaching a level in 2018 that was more than 20 times as large as it had been in 1870.The Japanese growth rate of 2.2% per year may not seem dramatically greater than the UK growth rate of 1.3% per year. Yet by 1980, Japan, which had been far poorer than the United Kingdom a century earlier, had surpassed the United Kingdom in per capita GDP, and the gap between the two countries continued to grow until 1992, when the Japan's per capita GDP exceeded that in the United Kingdom by more than 20%. However, sluggish growth in Japan in the 1990s allowed the United Kingdom to retake the lead by 2002, and they have had similar per capita GDP levels since then. We can draw other, similar comparisons from Table 6.1; compare, for example, the long-term growth performance of the United Kingdom against that of Canada or Sweden. Note, however, that even those countries that grew relatively slowly have dramatically increased their output per person during the past 148 years.
Although the comparisons highlighted by Table 6.1 span a long period of time, a change in the rate of economic growth can have important effects over even a decade or two.
For example, since about 1973 the United States and other industrialized countries have experienced a sustained slowdown in their rates of growth. Between 1947 and 1973, total (not per capita) real GDP in the United States grew by 4.0% per year, but between 1973 and 2021 U.S. real GDP grew by only 2.6% per year. To appreciate the significance of this slowdown,Learning Objectives
6.1 Discuss the sources of economic growth and the fundamentals of growth accounting.
6.2 Explain the factors affecting long- run living standards in the Solow model.
6.3 Summarize endogenous growth theory.
6.4 Discuss government policies for raising long-run living standards.
TABLE 6.1
Economic Growth in Eight Major Countries, 1870-2018
Levels of real GDP per capita
| Country | 1870 | 1913 | 1950 | 2018 | Annual growth rate 1870-2018 |
| Australia | 5217 | 8220 | 11,815 | 49,831 | 1.5 |
| Canada | 2702 | 7088 | 11,622 | 44,869 | 1.9 |
| France | 2990 | 5555 | 8266 | 38,516 | 1.7 |
| Germany | 2931 | 5815 | 6186 | 46,178 | 1.9 |
| Japan | 1580 | 2431 | 3062 | 38,674 | 2.2 |
| Sweden | 2144 | 4581 | 10,742 | 45,542 | 2.1 |
| United Kingdom | 5829 | 8212 | 11,061 | 38,058 | 1.3 |
| United States | 4803 | 10,108 | 15,240 | 55,335 | 1.7 |
Note: Figures are in U.S. dollars at 2011 prices, adjusted for differences in the purchasing power of the various national currencies.
Source: Data from the Maddison-Project, www.ggdc.net/maddison/maddison-project/home.htm, 2020 version.
imagine that the 1947-1973 growth trend had continued—that is, suppose that real GDP in the United States had continued to grow at 4.0% per year instead of at the 2.6% per year rate actually achieved. Then in 2021 U.S. real GDP would have been more than 92% higher than its actual value—a bonus of about $18 trillion, or almost $64,000 per person (in 2021 dollars).
No one understands completely why economies grow, and no one has a magic formula for inducing rapid growth. Indeed, if such a formula existed, there would be no poor nations. Nevertheless, economists have gained useful insights about the growth process. In this chapter we identify the forces that determine the growth rate of an economy over long periods of time and examine various policies that governments may use to try to influence the rate of growth. Once again, saving and investment decisions play a central role in the analysis. Along with changes in productivity, the rates at which a nation saves and invests—and thus the rate at which it accumulates capital goods—are important factors in determining the standard of living that the nation's people can attain.
6.1