The century-long experience of the Japanese economy provides economists with a great opportunity to study growth, business cycles and structural change. Japan, so poorly endowed with natural resources, has grown to become one of the major industrial nations. Figure 2.1 shows annual growth rates of real GDP for the prewar period from 1885 to 1940 and the post-war period from 1955 to 1995. The pre-war Japan kept 3 per cent growth on average for more than half a century, and the growth rate accelerated to almost 6 per cent in four decades after World War II. The standard Ramsey model cannot satisfactorily explain this postwar acceleration of growth.