ECON 101 · Macroeconomics

Economic
Growth

The single most powerful force for raising living standards — and one of the most important questions in all of macroeconomics.

Prof. Muhebullah Karimzada · UNBC Economics

The Long View

A sustained, long-run increase
in real GDP per capita.

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GDP Per Capita

We measure growth in output per person, adjusted for inflation. Total GDP can rise while the average citizen gets poorer if population grows faster than output.

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The Long Run

Growth is measured over decades, not quarters. At 2% per year, living standards double every 35 years. Over a century, 2% growth multiplies income 7-fold — the difference between 1924 and today.

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Why It Matters

Growth funds better healthcare, education, and infrastructure. The gap between rich and poor countries is almost entirely explained by decades of different growth rates — not one-time windfalls.

Sources of Long-Run Growth

Output Y = A · F(K, L) — three inputs drive growth: labour, capital, and technology.

L — Labour More workers expand the labour force. But quality matters most — the skills, education, and health of workers raise output per person. A key input but subject to diminishing returns.

K — Capital Physical capital — machinery, equipment, infrastructure — raises labour productivity. More capital per worker = more output per worker. Also subject to diminishing returns.

A — Technology Total Factor Productivity (TFP) — the efficiency with which K and L are combined. Technology, management, and institutions all raise A. The only source of growth without diminishing returns.

The Rule of 70

Divide 70 by the annual growth rate to find how many years income takes to double. Small differences compound into enormous gaps over generations.

1% / yr Doubles in 70 years. At year 70 income is ×2. Slow but steady — most of the world's poorest nations.

2% / yr Doubles in 35 years. At year 70 income is ×4. Typical of advanced economies like Canada.

3% / yr Doubles in 23 years. At year 70 income is ×8. East Asian miracle economies averaged this for decades.

Key 1% vs 3% is not a small difference — it is the difference between ×2 and ×8 over a lifetime. This is why economists obsess over growth rates.

Physical Capital vs. Human Capital

Both types of capital drive growth, but through different channels — and both are subject to diminishing returns without ongoing technology improvements.

Physical Capital (K)

🏗️ Machines, Equipment & Infrastructure

Tools, factories, roads, bridges, ports, and digital infrastructure that workers use to produce output. Investment in physical capital directly raises labour productivity.

Examples: a new factory, a highway, a server farm, a fleet of trucks.

Human Capital (H)

🎓 Skills, Education & Health

The knowledge, skills, and capabilities embedded in workers. Education raises productivity; better health reduces absenteeism and extends productive careers.

Examples: a university degree, on-the-job training, a vaccination programme.

Key limit: Both physical and human capital exhibit diminishing returns — each additional unit adds less to output than the last. Sustained long-run growth therefore requires not just more capital, but ongoing improvements in technology and institutions (A).

The Ultimate Driver

Productivity & Institutions

Countries with similar labour and capital stocks can have vastly different incomes. The difference is Total Factor Productivity — how efficiently those inputs are combined.

TFP Total Factor Productivity captures everything that raises output beyond what K and L alone explain — technology, management practices, and the quality of institutions.

Key The rich world's prosperity rests not just on having more capital — it rests on using that capital more productively within institutions that reward innovation.

✓ What Drives TFP

Secure property rights and rule of law — entrepreneurs capture gains from innovation

Quality education and research & development spending

Open trade — expands markets, accelerates technology transfer

Low corruption and effective government

✗ What Undermines TFP

Corruption and weak contract enforcement — reduces investment incentives

Poor education access — limits human capital accumulation

Trade barriers and monopolies — reduce competitive pressure to innovate

Political instability — raises uncertainty, deters long-run investment

Bottom line: Differences in TFP explain most of the income gap between rich and poor countries. Getting institutions right is the hardest — and most important — growth policy.

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Economic growth is not just about GDP — it is about what GDP enables: longer lives, better health, more education, and more choices. Getting growth right is the central challenge of economic policy in every generation.

— Prof. Muhebullah Karimzada · ECON 101 · UNBC

Economic Growth · Rule of 70 · Capital · TFP · Institutions

EconomicGrowth

A sustained, long-run increasein real GDP per capita.