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Lecture 3

Lecture Three: Economic Growth

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ECON 1010
Xueda Song

Lecture Three Economic GrowthJanuary 24 2012Basics of Economic GrowthBusiness cycle refers to the fluctuations of GDP over timeEconomic growth is the sustained expansion of production possibilities measured as the increase in real GDP over a given periodIt does not refer to a temporary expansion of production possibilities this is called an economic boomIt only refers to the sustained expansion of production possibilitiesCalculating Growth RatesThe economic growth rate is the annual percentage change of real GDPThe economic growth rate tells us how rapidly the total economy is expandingThe growth rates do not shed much light on what the standards of living are in a given countryThe standard of living depends on real GDP per personReal GDP per person is the real GDP divided by the populationReal GDP per person only grows if real GDP grows faster than the population doesThe Magic of Sustained GrowthThe Rule of 70 states that the number of years it takes for the level of a variable to double is approximately 70 divided by the annual percentage growth rate of the variableFor exampleA variable that grows at 7 per year will double in only 10 yearsA variable that grows at 2 per year doubles in 35 yearsA variable that grows at 1 per year doubles in 70 yearsHow Potential GDP GrowsEconomic growth occurs when real GDP increasesA one shot increase in real GDP or a recovery from recession is not economic growthEconomic growth is the sustained yearonear increase in potential GDP
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