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Chapter 7 Notes FULL lecture notes for Chapter 7

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Angela Trimarchi

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Econ 102 Chapter 7 Notes Prof: Angela Trimarchi
Chapter 7: Economic Growth
Mr. Speaker:
Of all the priorities I have mentioned today, the common denominator is
prosperity. A better life for all Canadians is the highest priority for this
government. To ensure long term prosperity we need to increase our
productivity. Canadians have built a great country with many advantages.
Canadians are hard workers and great innovators. But we are facing
increasing competition from countries like India and China. Our workforce is
aging. Government tax policies have discouraged investment and job
Economic Growth
Refers to growth of one of three interrelated macroeconomic variables
oAggregate output/income (GDP)
oGDP per capita
Rule of 70
States that if you divide the annual growth rate “g” of a variable into
the number 70, the result will tell you the number of years required
for the growth of that variable to double
NOTE: Always express “g” as a whole number
Arithmetic of Compound Growth
Suppose that you deposit $100 in a bank account which pays 5% per
year and you let the interest compound (earn interest on interest)
Year Closing Bank Balance
1 $100 + (0.05 * $100) = $105
2 $105 + (0.05 * 105) = $110.25
3 $110.25 + (0.05 * 110.25) = $115.76
4 $115.76 + (0.05 * 115.76) = $121.55
14 $188.57 + (0.05 * 188.57) = $197.99
Formula for Compound Growth
(Initial level) * (1+g)n = Level at the end of n years (g is the growth rate)
Question: Calculate the value of $100 at the end of 7 years using the above
Econ 102 Chapter 7 Notes Prof: Angela Trimarchi
formula. = $140.71
Calculation of a Growth Rate (g)
Let g denote the annual growth rate
g= {(Level at the end of n years)/ (Initial level)}1/n - 1
Exercise: Use the previous example of $100 invested where $100 is the
initial level and $197.99 is the level at the end of 14 years and calculate g.
g=0.04999 0.05 = 5%
Growth rate of real GDP
oIs an upward sloping (or horizontal) line
Line represents potential GDP
oPotential GDP: GDP level when an economy uses its resources to
their maximum potential
oCan be compared to operation on the boundary of the PPF
oPoints on the boundary are fully employed and resources are
being used efficiently
oWhen there is full employment, real GDP = potential GDP
Short-run movements around the long-run growth path are known as
economic fluctuations or business cycles
Business Cycle Graph
Label the graph at points a, b, c, d, e, f, g, h, i, j
Econ 102 Chapter 7 Notes Prof: Angela Trimarchi
At least 2 quarters or 6 months of negative GDP growth
Economic Growth Around the World
For a discussion on GDP per capita, investment share and population growth
around the world go to the World Bank website:
Determinants of Productivity
Recall One of the Ten Principles of Economics
“A country’s standard of living depends on its ability to produce goods
and services
How do we explain the huge differences in per capita GDP and growth
rates between different countries?
oCan be explained by productivity
Four Major Factors that Determine Productivity
Physical capital
Human capital
Natural resources
Technological knowledge
Forms of Technological Knowledge
Real GDP
Potential GDP