Chapter 22 Notes.docx

Chapter 22 Notes Calculating Growth Rates  the economic growth rate is the annual percentage change of real GDP  the growth rate of real GDP tells us how rapidly the total economy is expanding o useful for looking at the potential changes in the balance of power among nations o does NOT tell us about changes in the standard of living  the standard of living depends on real GDP per person o the contribution of real GDP growth to the change in the standard of living depends on the growth rate of real GDP per person o can be approximated by subtracting the population growth rate from the real GDP growth rate o real GDP per person only grows only if real GDP grows fast than the population Sustained Growth  sustained growth of real GDP per person can transform poor societies into wealthy ones in a way similar to compound interest (ie. continually earning interest on your investment, as well as interest on the interest earned)  the Rule of 70 states that the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable  at current growth rates, China’s real GDP per person will equal that of Canada by 2030 Economic Growth Trends: Canada  the average growth rate between 1926 and 2010 has been 2% o growth was most rapid during the 1960s o growth was the slowest during the 1980s Economic Growth Trends: World  in 2010, Canada had the second highest real GDP per person, behind the US, and ahead of Japan, France, Germany, Britain, and Italy o between 1960 and 2010, the gaps between Canada, the US and the big 4 were relatively constant, with Japan far behind (but growth fast)  Japan economy stagnated in the 1990s  many other countries have lower incomes per person and are growing more slowly than Canada o South America  35% of Canada in 1960  25% of Canada in 2000 (slower growth)  27% of Canada in 2010 (growth speeding) o Eastern Europe  34% of Canada in 1980  20% of Canada in 1993  32% of Canada in 2010 (growing) o Africa  12% of Canada in 1960  7% of Canada in 2010  Asian countries are growing at astonishing rates Potential GDP Growth  economic growth is sustained, year-after-year increase in potential GDP  the factors of production determine the quantity of real GDP that can be produced o the only variable factor of production that will affect this is the quantity of labour employed o potential GDP is the level of real GDP when the quantity of labour employed is the full-employment quantity  aggregate production function o if all time was spent on leisure, we would not do any work and Real GDP would be 0 o the more leisure we forgo, the greater the quantity of labour we supply and the greater is the quantity of real GDP produced  labour hours are not equally productive, so each additional hour of leisure forgone gives increasing but successively smaller amounts of real GDP (diminishing returns to scale) o the aggregate production function is the relationship that tells us how real GDP changes as the quantity of labour changes when all other influences on production remain the same  aggregate labour market o the demand for labour is the relationship between the quantity of labour demanded and the real wage rate  the quantity of labour demanded is the hours of labour demanded by all the firms in the economy in a given period  depends on price of labour (real wage rate)  the real wage rate is the money wage rate divided by the price level  quantity of goods and services that an hour of labour earns  influences the quantity of labour demanded because firms care about how much output they need to sell to earn those dollars  the quantity of labour demanded increases as the real wage rate decreases o the supply of labour is the relationship between the quantity of labour supplied and the real wage rate  real wage rate matters to households as it determines what they can but with those dollars  quantity of labour supplied increases as the real wage rate increases o the price of labour is the real wage rate  a shortage or a surplus only brings only a gradual change in the real wage rate  if there is a shortage, real wage rate rises to eliminate it  if there is a surplus, real wage rate falls to eliminate it o at the equilibrium real wage rate and level of employment, the economy is at full employment Potential GDP  at the equilibrium quantity of labour, the economy is at full employment, and the quantity of real GDP at full-employment is potential GDP Growing Potential GDP: Growth of the Supply of Labour  when the supply of labour grows, the supply of labour curve shifts rightward, and the quantity of labour at a given real wage rate increases  the quantity of labour is the number of workers employed multiplied by average hours per worker o number employed equals the employment-to-population ratio multiplied by working-age population o quantity of labour changes as a result of changes in:  average hours per worker  decreased with short workweek  employment-to-population ratio  increased with more women in labour force  working-age population o the effects of decreased workweek and increased women in labour force has kept the average hours per working-age person relatively constant o growth in the supply of labour has come from growth in the working-age population  effects of population growth o population growth brings growth in the supply of labour, but not the demand for labour or the production function o the economy can produce more output by using more labour, but there is no change in the quantity of real GDP that a given quantity of labour can produce o with an increase in the supply of labour (and no change in demand), the real wage rate decreases and the equilibrium quantity of labour increases  produced more output and potential GDP increases o however, despite the increase in potential GDP, the population increase decreases potential GDP per hour of labour  more people are sharing the GDP Growing Potential GDP: Growth of Labour Productivity  labour productivity is the quantity of real GDP produced by an hour of labour o calculated by dividing real GDP by aggregate labour hours (e/x real GDP is $1400 billion, aggregate hours 20 bill = labour productivity of $70/hour) o when labour productivity grows, real GDP per person grows and brings a rising standard of living  effects of an increase in labour productivity o if labour productivity increases, production possibilities expand  the quantity of real GDP that any given quantity of labour can produce increases  if labour is more productive, firms are willing to pay more for a given number of hours of labour so the demand for labour increases o with an increase in the demand for labour and no change in the supply of labour, the real wage rate rises and the quantity of labour supplied increases (equilibrium quantity increases) o if labour productivity increases, labour is more productive and more labour is employed Why Labour Productivity Grows  the fundamental precondition for labour