6.3 Long-Run Economic Growth

Although 2008 was a difficult year for Canadians seeking jobs, the jobs that were on offer paid extremely well by historical standards. In fact, just before this recession, Canadians believed that they were better off than they ever had been before and they had good reason to feel this way. Almost one hundred years earlier, in 1912, there was less than one telephone per 200 people in Canada. By 1952, there were almost 23 telephones per 100 people, and in 1962, almost 34 telephones per 100 people. According to Statistics Canada, in 2010, when cellular phones are included, more than 99% of all households had a telephone. But it was not just telephones that more Canadians could now afford. They could afford automobiles, televisions, washers, dryers, home computers, air conditioning, and so on. For example, in 1997 only about 40% of households had a home computer and about 17% had Internet access. By 2010, about 83% of households had a home computer and 78% had Internet access.

Long-run economic growth is the sustained upward trend in the economy’s output over time.

Why can so many Canadians now afford to buy products that they could not afford in the past? The answer is long-run economic growth, the sustained rise in the quantity of goods and services the economy produces. Figure 6-7 shows the growth since 1926 in Canadian real GDP per capita, a measure of total output per person in the economy. The severe recession of 1929–1933 stands out, but business cycles between World War II and 2007 are almost invisible, dwarfed by the strong upward trend. Part of the long-run increase in total output is accounted for by the fact that we have a growing population and workforce. But, as the upward trending curve demonstrates, the economy’s overall production has increased by much more than the population. On average, in 2010 the Canadian economy produced about $38 800 worth of goods and services per person, about twice as much as in 1971, more than three times as much as in 1951, and almost six times as much as in 1926.

Figure6-7Growth, the Long View Over the long run, growth in real GDP per capita has dwarfed the ups and downs of the business cycle. Except for the recession that began the Great Depression, recessions are almost invisible until 2009.
Source: Statistics Canada.

Long-run economic growth is fundamental to many of the most pressing economic questions today. Responses to key policy questions, like various levels of government’s ability to bear the future costs of health care, education, public pensions, and other programs, depend in part on how fast the Canadian economy grows over the next few decades. More broadly, the public’s sense that the country is making progress depends crucially on success in achieving long-run growth. When growth slows, as it did in the 1970s, it can help feed a national mood of pessimism. In particular, long-run growth per capita—a sustained upward trend in output per person—is the key to higher wages and a rising standard of living. A major concern of macroeconomics—and the theme of Chapter 9—is trying to understand the forces behind long-run growth.

Long-run growth is an even more urgent concern in poorer, less developed countries. In these countries, which would like to achieve a higher standard of living, the question of how to accelerate long-run growth is the central concern of economic policy.

As we’ll see, macroeconomists don’t use the same models to think about long-run growth that they use to think about the business cycle. It’s always important to keep both sets of models in mind, because what is good in the long run can be bad in the short run, and vice versa. For example, we’ve already mentioned the paradox of thrift: an attempt by households to increase their savings can cause a recession. But a higher level of savings, as we’ll see in Chapter 10, plays a crucial role in encouraging long-run economic growth.

WHEN DID LONG-RUN GROWTH START?

Today, Canada is much richer than it was in 1955; in 1955, it was much richer than it had been in 1905. But how did 1905 compare with 1855? Or 1805? How far back does long-run economic growth go?

Economic stagnation and unchanging living standards prevailed for centuries until the Industrial Revolution in the mid-1800s ushered in a new era of wealth and sustained increases in living standards.

Of course, Canada is a relatively recent creation; we didn’t exist as a country before 1867. And our rapid growth in the latter half of the nineteenth century was partly the result of large-scale immigration to the lands that were to become the Western provinces. But if we cast our net wider and look around the world, we find that long-run growth is a relatively modern phenomenon. If we go back to the period before 1800, we find a world economy that grew extremely slowly by contemporary standards. Between the years 1000 and 1800, according to the best available estimates, the world economy grew by less than 0.2% per year. Furthermore, the population grew almost as fast as the total real output, so that there was hardly any increase in real output per capita (the average amount of real output per person, equal to total real output divided by the total population).

This economic stagnation was matched by unchanged living standards. For example, information on prices and wages from sources such as monastery records shows that workers in England weren’t significantly better off in the early eighteenth century than they had been five centuries earlier. And it’s a good bet they weren’t much better off than Egyptian peasants in the age of the pharaohs. From examining historical records of birth and death rates, demographers know that in both cases human beings were living right on the edge of subsistence. However, long-run real economic growth has increased significantly in many countries since 1800.

Over the long-run, real aggregate output rises fairly steadily; in Canada it grew more than 20-fold over the 84 years from 1926 to 2010. In the last 50 years or so, Canadian real GDP per capita has grown by about 2.1% per year.

A TALE OF TWO COUNTRIES

Many countries have experienced long-run growth, but not all have done equally well. One of the most informative contrasts is between Canada and Argentina, two countries that, at the beginning of the twentieth century, seemed to be in a good economic position.

From today’s vantage point, it’s surprising to realize that Canada and Argentina looked rather similar before World War I. Both were major exporters of agricultural products; both attracted large numbers of European immigrants; both also attracted large amounts of European investment, especially in the railroads that opened up their agricultural hinterlands. Economic historians believe that the average level of per capita income was about the same in the two countries as late as the 1930s.

After World War II, however, Argentina’s economy performed poorly, largely due to political instability and bad macroeconomic policies. (Argentina experienced several periods of extremely high inflation, during which the cost of living soared.) Meanwhile, Canada made steady progress. Thanks to the fact that Canada has achieved sustained long-run growth since 1930, but Argentina has not, Canada’s standard of living is about three times as high as Argentina’s.

Quick Review

  • Because the Canadian economy has sustained long-run economic growth, Canadians live much better than they did a half-century or more ago.

  • Long-run economic growth is crucial for many economic concerns, such as a higher standard of living or financing government programs. It’s especially crucial for poorer countries.

Check Your Understanding 6-3

CHECK YOUR UNDERSTANDING 6-3

Question 6.5

Many poor countries have high rates of population growth. What does this imply about the long-run growth rates of total output that they must achieve in order to generate a higher standard of living per person?

Countries with high rates of population growth will have to maintain higher growth rates of total output than countries with low rates of population growth in order to achieve an increased standard of living per person because aggregate output will have to be divided among a larger number of people.

Question 6.6

Argentina used to be as rich as Canada; now it’s much poorer. Does this mean that Argentina is poorer than it was in the past? Explain.

No, Argentina is not poorer than it was in the past. Both Argentina and Canada have experienced long-run growth. However, after World War II, Argentina did not make as much progress as Canada, perhaps because of political instability and bad macroeconomic policies. Canada’s economy grew much faster than Argentina’s. Although Canada is now about three times as rich as Argentina, Argentina still had long-run growth of its economy.