ECON 201 Midterm: Midterm Based Review of LR Econ Growth (Ch 9)

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6 Feb 2017

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Econ 201 Chapter 9 Long Run Economic Growth
Long Run Economic Growth
We use real GDP per capita as a measure of long run economic growth
We use this instead of real GDP and nominal GDP per capita because:
o Real GDP focuses on the changes of quantity in goods and services being
produced, whereas nominal GDP is affected by changes in aggregate price level
o Real GDP per capita also provides a measure of average standard of living in a
Rule of 70 tells us how long it takes a variable that grows gradually over time to double
o = 70/(annual growth rate of variable)
What causes long run economic growth? An increase in productivity.
What causes an increase in productivity?
o Increase in physical capital (human made, manufactured resources like
buildings and machinery)
o Increase in human capital (education and knowledge embodied in the workforce)
o Technological advancements (improvement in means of producing g/s)
Aggregate Production Function
We can graphically depict the relationship between these three sources and productivity
(measured as real GDP per worker) in the aggregate production function
The function exhibits diminishing returns to capital
o When human capital and technology is fixed, each successive increase in
physical capital yields less output
Growth accounting estimates the contribution of each major source to economic growth
Total factor productivity: amount of input achieved with a given amount of factor inputs
o Usually interpreted as change in technology
o Technology raises production at any level of physical capital
In a aggregate production function, this would look like a shifted upward
curve with the same vertical intercept]
o When total factor productivity increases, the economy can produce more output
with same quantity of PC, HC, and labor
Cobb Douglas function is an equation form of the aggregate production function
A SHIFT of the curve is a result of technological progress
o Increasing tech = upward shift
A MOVEMENT ALONG the curve is a result in the change in physical capital
o More PC = point moves along curve to the right
Differences in Growth Rate
Differences in growth rates arise from differences in:
o Savings & investment spending (affects stock of PC)
o Education (affects HC)
o R & D (affects state of technology)
Role of Government
The government can increase economic growth by doing the following:
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