Economic GrowthEconomic Growth

Overview: Economic GrowthOverview: Economic Growth Economic growth lets Economic growth lets

standard of living rise for standard of living rise for entire economy. entire economy.

Key measurement = Key measurement = GDP; better is GDP per GDP; better is GDP per capita. capita.

As a population grows, As a population grows, GDP must grow more GDP must grow more quickly than population quickly than population for meaningful economic for meaningful economic growth. growth.

Growth can be Growth can be considered as an outward considered as an outward shift in the production shift in the production possibility curve, or a possibility curve, or a rightward shift of the rightward shift of the LRAS curve.LRAS curve.

Economic GrowthEconomic Growth A process, not the result A process, not the result

of a single eventof a single event Defined in terms of Defined in terms of

economy’s ability to economy’s ability to produce, indicated by produce, indicated by potential outputpotential output

implies that economy’s implies that economy’s ability to produce is ability to produce is increasingincreasing

Cyclical Growth vs True GrowthCyclical Growth vs True Growth Newspapers report Newspapers report

cyclical changes in cyclical changes in quarterly reports on quarterly reports on GDPGDP

Cyclical changes do Cyclical changes do have real effects, like have real effects, like unemployment and unemployment and inflationinflation

Cyclical change is Cyclical change is reflected in movement reflected in movement of AD and SRAS of AD and SRAS equilibrium point equilibrium point

True growth is long-True growth is long-term: shift of the LRAS term: shift of the LRAS to the rightto the right

On graph, true growth On graph, true growth appears rather like line appears rather like line of best fit on biz cycle of best fit on biz cycle graphgraph

Compound Growth, Rule of 72Compound Growth, Rule of 72 Small differences in Small differences in

percentage growth percentage growth compound over time compound over time to make large to make large differencedifference

Rule of 72: divide 72 Rule of 72: divide 72 by percentage by percentage increase, increase, approximates years approximates years to doubleto double

3.5% increase 3.5% increase doubles in 20 years. doubles in 20 years. 2.4% doubles in 30 2.4% doubles in 30 years. years.

Long term effects Long term effects can be huge. can be huge.

Growth Per CapitaGrowth Per Capita

Increase in population Increase in population can create increase in can create increase in real GDPreal GDP

Per capita (“per Per capita (“per head”) GDP reflects head”) GDP reflects true growth per true growth per person, or average person, or average wealth in economywealth in economy

For standard of living For standard of living to rise, GDP must rise to rise, GDP must rise faster than population faster than population risesrises

Approximate Δ GDP Approximate Δ GDP per capita % = Δ GDP per capita % = Δ GDP % – Δ population %% – Δ population %

Aggregate Production FunctionAggregate Production Function

Graph Graph employment employment against real GDP against real GDP (see p 462)(see p 462)

Why does it curve, Why does it curve, rather than rising rather than rising linearly?linearly?

How To Derive LRAS Curve?How To Derive LRAS Curve?

Use Use employment/wage employment/wage graph to find graph to find equilibrium point real equilibrium point real wage and wage and employment levelemployment level

Use Aggregate Use Aggregate Production Function Production Function to find real GDPto find real GDP

Plot real GDP on Plot real GDP on macroeconomic macroeconomic equilibrium graphequilibrium graph

Real GDP

Price Level

AD

SRAS

LRAS

Macroeconomic Equilibrium

Full Employment

Calculating LRASCalculating LRAS