Chapter 6: Goal of Economic Growth
Most economists consider that the longrun rate of economic growth (REAL
GDP) is determined by aggregate supply or real variables (i.e. labour, capital and
Shortrun fluctuations above or below ‘potential GDP’ are attributed to variations
n the level of aggregate demand
Some economists (Real Business Cycle Theorists) deny any role for ‘demandside
The Capacity to produce: Potential GDP and the Production function
Potential GDP is what the economy could produce if its labour force and other
resources were fully employed (under normal conditions).
An economy’s production function is the mathematical depiction of the
relationship between an economy’s inputs and outputs. It shows the volume of
output that can be produced from given inputs (labour, capital) given the available
The Growth Rate of Potential GDP
The growth rate of potential GDP depends on:
Growth rate of the labour force
Growth rate of the nation’s capital stock
The rate of technical progress
How is it measured?
labour productivity = total output/total hours
This measures output per hour of work
GDP can be expressed as:
GDP = Hours of work x labour productivity
The equation above in growth rates is:
Growth rate of potential GDP = Growth rate of labour input + Growth rate of
labour productivity Example: 3% = 2% + 1%
Is Faster Growth Better?
Faster growth may lead to greater pollution, global warming, crowding.
Greater consumption may not necessarily make people happier.
Growth may drive people to work longer hours.
Faster growth may generate higher inflation, in some cases.
Unemployment rate = the number of unemployed people, expressed as a
percentage of the labour force
High unemployment is socially wasteful.
Unemployment entails a loss in output for the society as a whole, a loss that can
never be recovered.
Unemployment is a serious personal problem for the unemployed.
o Income relinquished
o Psychological distress and unhappiness (see the already mentioned 2010 study
by the CSLS)
Unemployment rate is greater for younger and