Economics 1021A/B Lecture Notes - Lecture 4: Potential Output, Diminishing Returns, Human Capital

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Sean Burkett

Document Summary

Economic growth occurs when real gdp increases. Economic growth is a sustained increase in potential gdp. With increase in population, supply of labour increases, labour per wage rate rises and potential gdp increases while the real wage rate falls. >> potential gdp per hour of labour falls (diminishing returns) With increase in labour productivity, potential gdp increases while pushing up the pf upward and demand for labour increases with the real wage rate and quantity of labour. >> potential gdp per hour of labour increases (increase in living standards) Fundamental precoandition for labour production growth is the incentive system created by firms, markets, property rights, and money. With preconditions in place, three things influence its pace; 1. For real gdp per person to grow, real gdp growth must exceed pop growth rate. Growth accounting is a tool that calculates the quantitative contribution to labour productivity growth of each of its sources.