Macroeconomics For Dummies

Chapter 8

GDP Growth in the Long Run

IN THIS CHAPTER

Compounding growth: The rule of 70

Marginalizing firm decisions

Growing GDP over time

Steadying the state

We’ve said it before and we’ll say it again: Economists love models. Building an economic model and considering its implications forces you to think hard about which assumptions lead to which results and whether those assumptions make sense. And it’s only after you have a model that you can begin to test it with evidence.

Some of the time, or maybe most of the time, economists disagree at one or more of these stages. They argue over assumptions. They argue over the empirical evidence. They argue over arguing. But in macroeconomics, one area where economists don’t argue too much is about the nature of the long run. There is a lot of agreement about the economy’s long-run behavior and which macroeconomic policies will promote a healthy long-run growth path.

That long-run path is an anchor — a full equilibrium. It is in fact the potential output described in Chapter 3, because it reflects full employment of the economy’s capital and labor resources. Whatever happens in the short run, there are forces (sometimes weak but always present) that pull the economy back toward that potential. Put somewhat differently, recessions can cause the economy to drift away from its long-run equilibrium for some time and by a significant amount. ...