# Economics 1022A/B Lecture Notes - Lecture 3: Potential Output, Workforce Productivity, Rolladen-Schneider Ls1

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15 Aug 2016
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Chapter 22
Economic Growth
The Basics of Economic Growth
The economic growth rate is the annual percentage change of real GDP.
The standard of living depends on real GDP per person, which is real GDP
divided by the population.
Sustained growth of real GDP per person can transform a poor society into a
wealthy one.
We calculate how many years it takes for the level of any variable, including real
GDP per person, to double, by using the Rule of 70.
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.
Long-Term Growth Trends
Long-term growth trends are the trends in potential GDP.
Check out Figure 22.2 on p. 520 of your textbook to study real GDP per person
in Canada between 1926 and 2010.
During this period, real GDP per person grew 2.0 percent a year, on the average.
Real GDP growth has been similar in Canada, the Europe Big 4 (France,
Germany, Italy, and the United Kingdom), and the United States since 1960. Growth in Japan
was very rapid during the 1960s, slower during the 1980s, and even slower during the 1990s.
How Potential GDP Grows
Potential GDP increases if there is an increase in population or an increase in labour
productivity.
Consider an increase in population. In the figure, the labour supply curve shifts rightward from
LS0 to LS1, the real wage decreases and the quantity of labour employed at full employment
increases.
In the figure below, the increase in the full-employment level of labour increases
potential GDP from \$1,400 billion to \$1,750 billion along the production function.
With an increase in population,
potential GDP per hour of work decreases.
Initially, with potential GDP at
\$1,400 billion and labour hours at 20 billion, potential GDP per hour of work was \$70.
With the increase in population,
potential GDP is \$1,750 billion and labour hours are 30 billion, and potential GDP per hour of
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\$10 USD/m
Billed \$120 USD annually
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