Level effects vs. growth rate effects

Here is an excellent blog post by John Cochrane on that topic, here are some scattered summary bits:

As it turns out, the difference between “growth” and “level” effects in growth theory and facts is not so strong. Many economists remember vaguely something from grad school about permanent “growth” effects being different and much larger than “level” effects.  It turns out that the distinction is no longer so clear cut; “growth” is smaller and less permanent than you may have thought, and levels are bigger and longer lasting than you may have thought.

…But “temporary” “short-run” or “catch-up” growth can last for decades.  And it can be highly significant for people’s well-being. From 2000 to 2014, China’s GDP per capita grew by a factor of 7, from $955 per person to $7,594 per person, 696%, 14.8% annual compound growth rate (my, compounding does a lot). And they’re still at 15% of the US level of GDP per person. There is a lot of “growth” left in this “level” effect!

…So where are we? There is no magic difference between permanent growth effects and one-time level increases. All we have are distortions that change the level of GDP per capita.

Do read the whole thing.


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