April 27, 2015 Begin Unit 5 : Economic Growth and Productivity HW: Activity 6-1 and 6-2 Exam: This Thursday  Vocabulary Due Thursday (Ch. 25) Current Event Due Friday

Long Run Economic Growth Q: What is the difference between SR and LR economic growth? Long run economic growth occurs when a country can produce more of a good without having to give up another good or when a country can produce more overall. On the AS/AD graph, long run economic growth is demonstrated by a rightward shift of the LRAS curve. And on the PPC?...

Long Run Economic Growth 3 Important Sources of Long Run Economic Growth: Quantity and Quality of labor (improvements in education, training, health of workers, etc.) Quantity and Quality of capital (Investment, research, development, etc.) Level of technology Increases in any of these will increase real GDP.

Economic Growth Investing in the following factors contribute to a nation’s productivity, and thus its’ economic growth: Human capital: education and skills a worker possesses. Physical capital: any manufactured unit that is used in production Technological Advancement Nature’s Gifts In addition to above list, Government/Fed Policies

Long Run Economic Growth Economic Growth is measured by changes in Real GDP or by changes in Real GDP per capita. Real GDP per capita is real GDP divided by the total population Real GDP per capita measures Standard of Living

There are some problems with using GDP to measure a nation’s true standard of living 6

The top 10 most populated countries

GDP Per Capita

Investment Spending Investment Spending leads to an increase in physical capital Investment Spending comes from domestic savings or inflows of foreign capital Business R&D is a key to increasing physical capital

Role of Government in Promoting Long Run Economic Growth Key to LR economic growth is productivity of a nation. What does each worker produce (per capita)? INVESTMENT IN PHYSICAL CAPITAL! INVESTMENT INFRASTRUCTURE INVESTMENT IN HUMAN CAPITAL (EDUCATION OF WORKFORCE) USE, PROTECT, SUSTAIN NATURAL RESOURCES FACILITATE TECHNOLIGICAL PROGRESS PROVIDE POLITCAL STABILITY ENSURE PROPERTY RIGHTS LIMITED INTERVENTION WHEN NECESSARY   1. Governments and Physical Capital Governments provide infrastructure by building roads, airports, seaports, electrical grids and many others. These systems help consumers and firms engage in economic activity that promotes economic growth. Private firms also invest in physical capital like building new factories, shopping malls, and housing developments. Firms also purchase computer systems, delivery trucks, forklifts and many other pieces of physical capital. If the government can provide infrastructure and maintain a financial system that provides for the saving and borrowing that is required for private investment, a nation’s physical capital will grow. 2. Governments and Human Capital Governments pay for the vast share of primary and secondary education. Any American child can complete high school at very little out-of-pocket expense. When nations make education a higher priority, they subsidize it. More people acquire the education and the nation prospers with long-run economic growth. 3. Governments and Technology While much R & D is done by private companies, the government subsidizes this research with grants. The government also provides direct support and grant money to professors at public and private universities and that research helps to drive technological progress. 4. Political Stability, Property Rights, and Excessive Government Intervention Suppose a firm wants to build a factory that produces gadgets in a foreign nation Kreblakistan. Firms are going to be very hesitant to invest in Kreblakistan if the government might be radically overthrown, or if the government could just claim the factory as government property. Or maybe Kreblakistan’s courts and government bureaucracies are corrupt so that day-to-day business transactions require bribes or hush money. Firms are not going to want to invest in nations such as this. At the other extreme, a nation’s government could excessively intervene in markets with high taxes, tariffs, or other anti-competitive policies. This can also slow down economic growth. 11

THE REAL PRICE OF OIL IS BASED ON DEMAND AND NOT IMPORTATION ISSUE: (SEE THE NEXT SLIDE) 12

AS THE ECONOMY GROWS CONSUMPTION (DEMAND) GROWS WITH IT AND THIS, NOT IMPORTATION ISSUES, ARE THE CAUSE OF HIGHER PRICES AT THE GAS PUMP TODAY 13

LONG-RUN ECONOMIC GROWTH IS BASED UPON THE SUSTAINED RISE IN THE PRODUCTION OF GOODS AND SERVICES SHORT-RUN “UPS” AND “DOWNS” ARE THE RESULT OF THE BUSINESS CYCLE

Long-run Economic Growth and the Production Possibilities Curve K K’ 15

Remember this? Economic Growth and Potential Growth for the Production Possibility Curve 16

In the AD/AS model, a short-run fluctuation of the business cycle would be seen as a shift of the AD curve or SRAS curve. For example, a recessionary gap may result in a decrease in input prices and an increase in SRAS, but that does not mean the same thing as economic growth. Likewise, an inflationary gap results not in growth, but in a return of the economy to it’s long run equilibrium.

You must distinguish between long-run growth and short-run business cycle (SRAS) 18

The Long-run Aggregate Supply Curve 19

Long-run Growth and the LRAS Curve 20