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

creation.

Economic Growth

Refers to growth of one of three interrelated macroeconomic variables

oAggregate output/income (GDP)

oGDP per capita

oProductivity

See: http://www.csls.ca/ipm/ipm19.asp

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

70

g

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%

Graphs

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

0

i

h

j

a

b

c

f

e

g

d

Econ 102 Chapter 7 Notes Prof: Angela Trimarchi

Recession:

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: www.worldbank.org

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

0

Real GDP

Potential GDP

Time

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###### Document Summary

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. But we are facing increasing competition from countries like india and china. Government tax policies have discouraged investment and job creation. Refers to growth of one of three interrelated macroeconomic variables: aggregate output/income (gdp, gdp per capita, productivity. 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. Suppose that you deposit in a bank account which pays 5% per year and you let the interest compound (earn interest on interest)

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