Page 410 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:

• How we measure long-run Module 37
economic growth
• How real GDP has changed
over time Long-run
• How real GDP varies across
countries
• The sources of long-run Economic Growth
economic growth
• How productivity is driven by
physical capital, human
capital, and technological Comparing Economies Across Time and Space
progress
Before we analyze the sources of long - run economic growth, it’s useful to have a sense
of just how much the U.S. economy has grown over time and how large the gaps are be-
tween wealthy countries like the United States and countries that have yet to achieve a
comparable standard of living. So let’s take a look at the numbers.

Real GDP per Capita
The key statistic used to track economic growth is real GDP per capita—real GDP divided
by the population size. We focus on GDP because, as we have learned, GDP measures
the total value of an economy’s production of final goods and services as well as the in-
come earned in that economy in a given year. We use real GDP because we want to sep-
arate changes in the quantity of goods and services from the effects of a rising price
level. We focus on real GDP per capita because we want to isolate the effect of changes in
the population. For example, other things equal, an increase in the population lowers
the standard of living for the average person—there are now more people to share a
given amount of real GDP. An increase in real GDP that only matches an increase in
population leaves the average standard of living unchanged.
Although we learned that growth in real GDP per capita should not be a policy goal
in and of itself, it does serve as a very useful summary measure of a country’s
economic progress over time. Figure 37.1 shows real GDP per capita for the United
States, India, and China, measured in 1990 dollars, from 1908 to 2008. (We’ll talk
about India and China in a moment.) The vertical axis is drawn on a logarithmic scale
so that equal percent changes in real GDP per capita across countries are the same size
in the graph.
To give a sense of how much the U.S. economy grew during the last century, Table 37.1
shows real GDP per capita at 20-year intervals, expressed two ways: as a percentage of the
1908 level and as a percentage of the 2008 level. In 1928, the U.S. economy already pro-
duced 144% as much per person as it did in 1908. In 2008, it produced 684% as much per

368 section 7 Economic Growth and Productivity