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Lecture 4

EC140 Lecture Notes - Lecture 4: Capital Accumulation, Workforce Productivity, Growth Accounting


Department
Economics
Course Code
EC140
Professor
Ken Jackson
Lecture
4

This preview shows pages 1-3. to view the full 9 pages of the document.
Chapter 3 – Economic Growth

 !
The Basics of Economic Growth
Economic growth"#$%#&
 
Economic growth rate#'$%#
%($)$%
$
##$% $*real
GDP per person)GDP growth rate minus population growth rate = real
GDP / population
The Magic of Sustained Growth
+#$%%
#$,#- 
.
Simple interest"
-/*0')/*0%*/*%*
/*%
Compound interest (growth)
The Rule of 70"#%,% % 
#) 70 divided by the (constant) annual % growth rate of the
variable.
%$#12principal3%(
*#%## ##$#
-#'*/*$- .
-4%* /*1/5/*
-4%* /*1/5/*
-%T *compound value %/*'5/*6-1.T
Compound Interest Formula
 PV #%#- #.
 FV# #%#%##-%##
#.
i)%*'5
T#%-#$.23
 %##
*compound FV%## 7
FV = PV(1+i)T
8$*"VT = V0(1+g)T
-9 #-%$.
-97 #%7
-:$;$

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

#$97569*VT / V0 = 2
Rule of 70 – not magic Exact Time to Double
##$-%*<* #.
+#=#$>?+74?72$3"
Rule of 70 approximations
@(,%=#$$
:$;#
A"
- TDouble = ln2 / ln(1+g)  ln2 = 0.7
TDouble = 0.7/g  ln(1+g) = g (for g≤0.1)
B#*#$
#70/growth rate as %
Accounting for changes in GDP
C(D% 
#%
F#%%*FE
#%%
4$##%
$%#*$
%#A*$
# 
Economic growth trends
7$# 

Growth in the Canadian Economy
80E*$ $'
%#$#$
CC
Exact vs. Rule of 70 Doubling
Time

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

#$0 $!!'
#$E$*##
%0
Real GDP growth in World Economy
F+$
$
G$%*#$
BH$ $#$H
% $
How Potential GDP grows
@$)sustained, year-on-year
potential GDP.
Potential GDP"=#%%#I)J#5
 8
7#
1. The aggregate production function (Neoclassical)
- Production possibilities frontier: %$ 
#
- Law of diminishing returns: #%$5$=#%
#%#)## 
#)$#%# #% 
%K(#%%
- Aggregate production function: %$J
#$)J#-#.$ $
%
-LM#%$
$$$#%#587-NOP.N#*O
*P=#%#*7%$*87D
#$7$%#
-O%?$$$#%#
1. diminishing marginal product %ON-$
."##$

2. constant returns to scale -ON$
=#."*#
- Marginal product = change in real GDP / change in labour hours
-C $#*#
*#)#%$ $ $
2. The aggregate labour market
-=#%##=#%
#
- Real wage rate:$  )J$
 #%#Money wage rate 5#%
#%#
- Demand for labour:J%#$
J5Q##K#$$D#
J#K####/
J$)# #%
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