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Chapter 25

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ECON 110
Ian James Cromb

Chapter 25: The Difference between Short-Run and Long-Run Macroeconomics Accounting for Changes in GDP  The value of potential GDP is estimated by combining three pieces of information o The amounts of available factors of production, and estimate of these factors’ “normal” rate of utilization, and an estimate of each factor’s productivity  When studying long-run trends in GDP, economists focus on changes in potential output  When studying short-run fluctuations, economists focus on the change in the output gap GDP Accounting: The Basic Principle  ⁄ ⁄ 1. F is the economy’s factor supply; it is the total amount of all factors of production that the economy currently possess 2. F EF is the factor utilization rate; it is the fraction of the total supply of factors that is actually used or employed at any time 3. GDP/F iE a simple measure of productivity because it shows the amount of (GDP) per unit of input employed The Long Run: Factor Supply  There are two main factors of production that account for most of the change in the economy’s factor supply Labour  The economy’s supply of labour can increase for two main reasons o Population increase  immigration, more births, less deaths o Increase the fraction of the population that chooses to seek employment – this fraction is called the labour force participation rate  Labour supply doesn’t usually change significantly from year to year  long run changes Capital  Firms that choose to purchase or build investment goods today are accumulating physical capital that will be used to produce output in the future  Today’s flow of investment expenditure adds to the economy’s stock of physical capital  Changes tend to happen very gradually  important for explaining L-R changes, not S-R The Long-Run: Productivity  An increase in productivity is called productivity grow
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