1.Define economic growth and explain it using the production possibilities model and the concept of potential output?
1.Growth is a process. It is not a single event; rather, it is an unfolding series of events.
2.We define growth in terms of the economy's ability to produce goods and services, as indicated by its level of potential output.
3.Growth suggests that the eco
2.State the rule of 72 and use it to show how even small differences in growth rates can have major effects on a country's potential output over time.
1)variable growing at some exponential rate doubles over fixed intervals of time. The doubling time is given by the rule of 72, which states that a variable's approximate doubling time equals 72 divided by the growth rate, stated as a whole number.
2)Over
3.Calculate the percentage rate of growth of output per capita
�To assess changes in average standards of living, we subtract the percentage rate of growth of population from the percentage rate of growth of output
When a quantity grows at a given percentage rate, it experiences what
exponential growth
Real gDP per person
outa per cAPITA
Economic Growth
is the process through which an economy's production possibilities curve shifts outward. We measure it as the rate at which the economy's potential level of output increases.
�wHAT implies exponential growth.
When something grows exponentially, it _over fixed intervals of time; these intervals may be computed using _
1)Growth of a quantity at a particular percentage rate
2) DOUBLES
3) the rule of 72
�Small differences in rates of economic growth can lead to
large differences in levels of potential output over long periods of time
1.Discuss the sources of economic growth
There we learned that the main sources of growth for the United States from 1948 to 2002 were divided between increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and te
�The main sources of growth for the United States from 1948 to 2002 were divided between what? Since 1995, however, WHAT have been the main drivers of economic growth in the United States.
1) increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and technology (about 40%).
2) improvements in factor quality and technology
What reflects reflect various differences in economic structures and policies?
...�There has been a growing disparity in the rates of economic growth in industrialized countries in the last decade, which may reflect various differences in economic structures and policies
Changes in real GDP from quarter to quarter or even from year to year are ?
short-run fluctuations that occur as aggregate demand and short-run aggregate supply change.
short-run changes in real GDP say
little about economic growth
In the long run, economic activity moves
toward its level of potential output
An increase in potential output thus implies an outward shift
in the production possibilities curve.
There are three key points about economic growth to keep in mind:
1.Growth is a process. It is not a single event; rather, it is an unfolding series of events.
2.We define growth in terms of the economy's ability to produce goods and services, as indicated by its level of potential output.
3.Growth suggests that the eco
tells us why we use _, rather than actual real GDP, as our measure of economic growth. Actual values of real GDP are affected not just by changes in the potential level of output but by
changes in potential output,
the cyclical fluctuations about that level of output
how do you calculate the cyclcical fluctuations
One way to do this is to select years in which the economy was operating at the natural level of employment and then to compute the annual rate of change between those years
Outta per capita
real gdp/N
We use output per capita as a
gauge of an economy's material standard of living
% of rate of growth of output per capita
0
why is it important to gain a deeper understanding of what determines long-run aggregate supply (LRAS).
Because economic growth can be considered as a process in which the long-run aggregate supply curve shifts to the right, and because output tends to remain close to this curve,
An aggregate production function
relates the total output of an economy to the total amount of labor employed in the economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged
In drawing the aggregate production function, the amount of labor varies, but everything else that could affect output, specifically the quantities of other factors of production and technology, is what?
fixed
The shape of the aggregate production function shows that as employment increases
output increases, but at a decreasing rate
Diminishing marginal returns occur when
additional units of a variable factor add less and less to total output, given constant quantities of other factors.
It is that level of potential output that determines the position of
the long-run aggregate supply curve
The position of the long-run aggregate supply curve is determined by the
aggregate production function and the demand and supply curves for labor.
The increase in the real wage reflects
enhanced productivity
the amount of output per worker
enhanced productivity
The higher output is a reflection of a
higher natural level of employment, along with the fact that labor has become more productive as a result of the technological advance.
technological gains or increases in the stock of capital
new jobs become available and they generally offer higher wages. The demand for labor rises.
an increase in the supply of labor,
Another event that can shift the long-run aggregate supply curve
An increased supply of labor could result from
immigration, an increase in the population, or increased participation in the labor force by the adult population.
The increase in the supply of labor does not change the stock of capital or natural resources, nor does it change technology�it therefore
does not shift the aggregate production function.
Of course, the aggregate production function and the supply curve of labor can shift together, producing
higher real wages at the same time population rises.
Our model of long-run aggregate supply tells us that in the long run, What are determined by the economy's production function and by the demand and supply curves for labor.
real GDP, the natural level of employment, and the real wage
Economic growth occurs only
if an event shifts the economy's production function or if there is an increase in the demand for or the supply of labor.
The aggregate production function relates what to what
�The aggregate production function relates the level of employment to the level of real GDP produced per period.
�The real wage and the natural level of employment are determined by
intersection of the demand and supply curves for labor.
Potential output is given by
the point on the aggregate production function corresponding to the natural level of employment.
This output level is the same as that shown by
the long-run aggregate supply curve.
�Economic growth can be shown as a series of shifts to the right in LRAS. Such shifts require either
upward shifts in the production function or increases in demand for or supply of labor.
As we have learned, there are two ways to model economic growth:
1) as an outward shift in an economy's production possibilities curve, and (2) as a shift to the right in its long-run aggregate supply curve.
In order to devote resources to increasing physical and human capital and to improving technology�activities that will enhance future production�society must
forgo using them now to produce consumer goods.
�In general, countries with accelerating per capita growth rates also experienced significant increases in employment, while those with stagnant or declining employment generally experienced
reductions in per capita growth rates.
�Enhancements in human capital contributed to labor productivity and economic growth, but in slower growing countries such improvements
were not enough to offset the impact of reduced or stagnant labor utilization.
�Other factors associated with more growth include:
investments in physical and human capital, sound macroeconomic policies (especially low inflation), private sector research and development, trade exposure, and better developed financial markets.
�With qualifications, the study found that strict regulation of product markets (for example, regulations that reduce competition) and strict employment protection legislation (for example, laws that make hiring and firing of workers more difficult) had
negative effects on growth.
�All countries show a large number of firms entering and exiting markets. But, a key difference between the United States and Europe is that
new firms in the United States start out smaller and less productive than those of Europe but grow faster when they are successful.
The report hypothesizes that lower start-up costs and less strict labor market regulations may
encourage U.S. entrepreneurs to enter a market and then to expand, if warranted. European entrepreneurs may be less willing to experiment in a market in the first place.