Macroeconomic Theory, Econ 102 - Franois Geerolf

Macroeconomic Theory, Econ 102

Recitation 0 - Basics about Difference Equations / Growth Rates

This first recitation section presents some methodological tools that we will need for
the analysis of long-term growth, as well as for the analysis of short-term fluctuations
during the rest of the course: difference equations, and growth rates.

0.1 Difference Equations

In the course of this quarter, we will repeatedly need a simple yet powerful mathematical
tool: the solution of geometric difference equations. A geometric difference equation is
an equation of the form:
ut+1 = aut ,

for

t t0 .

(V1)

t t0 + 1.

(V2)

or, equivalently:
ut = aut1 ,

for

where the initial value for ut at some date t0 , denoted by ut0 is given and positive (initial
condition ut0 > 0). The solution to this equation is, in general:
ut = att0 ut0 ,

for t t0

(1)

Depending on the position of a > 0 with respect to 1, ut stays constant, increases

exponentially to infinity, or decreases to 0 over time:
1. If a = 1, ut+1 = ut and so ut is constant over time, and in particular is equal to
its initial value:
ut = ut0

for t t0 .

2. If a > 1 then:
ut = att0 ut0 .
This is the case we will see in the Growth section of the course (the one about the
"long run": wait for the next lectures).

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Macroeconomic Theory, Econ 102 - Franois Geerolf

3. If 0 < a < 1, then we have that:
ut = att0 ut0 0.
This is the kind of result we will use in the Business Cycles section of the course
(the one about the "short run").

0.2 Growth Rates

This exercice uses the data displayed on Table 1 at the end of this Problem Set.
1. Calculate the percentage growth rates in real GDP in each of the years 2001 to
2013, from the previous year. Do the same for the ten year periods growth rates
between 1960 and 2000.
2. A useful transformation is to take the natural logarithm of these time series. Explain why for small time intervals, growth can be approximated by ln(yt )ln(yt1 ).
Apply this method to give an approximate answer to Question 1.
3. How good is the approximation for one-year growth rates? for ten year growth
rates? Why?

0.3 About the "Rule of 70"

From page 48 in the textbook, Charles Jones talks repeatedly about the "Rule of 70":
if yt grows at a rate of g percent per year, then the number of years in takes for yt to
double is approximately equal to 70/g.
1. Prove the "rule of 70". In particular, what is an exact version of this rule?
2. Create your own "rule": how much time does it take for a quantity to be multiplied
by 10 if it grows at a rate of g percent per year, as a function of g?

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Macroeconomic Theory, Econ 102 - Franois Geerolf

Table 1: U.S. Real Gross Domestic Product, Chained Dollars.

1950
1960
1970
1980
1990
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Y
2184
3108.7
4722
6450.4
8955
12559.7
12682.2
12908.8
13271.1
13773.5
14234.2
14613.8
14873.7
14830.4
14418.7
14783.8
15020.6
15369.2
15710.3

C
1360.5
1891
2903
3991.5
5672.6
8170.7
8382.6
8598.8
8867.6
9208.2
9531.8
9821.7
10041.6
10007.2
9847
10036.3
10263.5
10449.7
10699.7

I
293.7
359.7
585.2
881.2
1240.6
2375.5
2231.4
2218.2
2308.7
2511.3
2672.6
2730
2644.1
2396
1878.1
2120.4
2230.4
2435.9
2556.2

NX

-477.8
-502.1
-584.3
-641.9
-734.8
-782.3
-794.3
-712.6
-557.8
-395.4
-458.8
-459.4
-452.5
-420.4

G
569.6
1007
1457.7
1612.5
2224.3
2498.2
2592.4
2705.8
2764.3
2808.2
2826.2
2869.3
2914.4
2994.8
3089.1
3091.4
2997.4
2953.9
2894.5

Res
-27.7
-131.3
-157.3
-41.3
-106
-83.6
-90.9
-70.5
-45.5
-19.6
-2.2
-3.8
-9.7
-13.6
0.2
-1.1
-10.8
-17.3
-22.5

Notes: Source: NIPA. Billions of chained (2009) dollars. Last Revised on: December 23, 2014 Next Release Date January 30, 2015. Available on the Bureau of Economic Analysis Website. Y
is Gross domestic product, C is Personal consumption expenditures, I is Gross private domestic
investment, NX is Net exports of goods and services, G is Government consumption expenditures
and gross investment

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