Economic Growth

Overview: Economic Growth  Economic growth lets standard of living rise for entire economy.  Key measurement = GDP; better is GDP per capita.  As a population grows, GDP must grow more quickly than population for meaningful economic growth.  Growth can be considered as an outward shift in the production possibility curve, or a rightward shift of the LRAS curve.

Economic Growth  A process, not the result of a single event  Defined in terms of economy’s ability to produce, indicated by potential output  implies that economy’s ability to produce is increasing

Cyclical Growth vs True Growth  Newspapers report cyclical changes in quarterly reports on GDP  Cyclical changes do have real effects, like unemployment and inflation  Cyclical change is reflected in movement of AD and SRAS equilibrium point  True growth is long- term: shift of the LRAS to the right  On graph, true growth appears rather like line of best fit on biz cycle graph

Compound Growth, Rule of 72  Small differences in percentage growth compound over time to make large difference  Rule of 72: divide 72 by percentage increase, approximates years to double  3.5% increase doubles in 20 years. 2.4% doubles in 30 years.  Long term effects can be huge.

Growth Per Capita  Increase in population can create increase in real GDP  Per capita (“per head”) GDP reflects true growth per person, or average wealth in economy  For standard of living to rise, GDP must rise faster than population rises  Approximate Δ GDP per capita % = Δ GDP % – Δ population %

Aggregate Production Function  Graph employment against real GDP (see p 462)  Why does it curve, rather than rising linearly?

How To Derive LRAS Curve?  Use employment/wage graph to find equilibrium point real wage and employment level  Use Aggregate Production Function to find real GDP  Plot real GDP on macroeconomic equilibrium graph

Calculating LRAS