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The Facts of Growth We now turn from the determination of output in the short and medium run—where fluctuations dominate—to the determination of output in the long run—where growth dominates. Growth is the steady increase in aggregate output over time. Growth in RichCountries Since 1950 Growth in RichCountries Since 1950 Output per capita equals GDP divided by population. The standard of living depends on the evolution of output per capita, not total output. To compare GDP across countries, we use a common set of prices for all countries. Adjusted real GDP numbers are measures of purchasing power across countries, also called purchasing power parity (PPP) numbers. Growth in RichCountries Since 1950 The straightforward method of taking a country’s GDP expressed in that country’s currency, and then using the current exchange rate to express it in terms of dollars does not always work for two reasons: First, exchange rates can vary a lot. The second reason goes beyond fluctuations in exchange rates. In general, the lower a country’s output per capita, the lower the prices of food and basic services in that country. Growth in RichCountries Since 1950 Growth in RichCountries Since 1950 From the data in table 10-1 we conclude that: The Large Increase in the Standard of Living Since 1950 Real output per capita has increased by a factor of 3.1 since 1950 in the United States, by a factor of 4.1 in France, and by a factor of 10.2 in Japan. These numbers show what is sometimes called the force of compounding. The Decrease in Growth Rates Since the Mid-1970s A very useful rule is the “rule of 70.” If a variable grows at x% a year, then it will take approximately 70/x years for the variable to double. At a growth rate of 4.1% per year – the average growth rate across the countries from Table 10-1 from 1950 to 1973 – it takes only 16 years for the standard of living to double. At a growth rate of 2.0% per year – the average from 1973 to 2000 – it takes 35 years, more