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Chapter 22

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Western University
Economics 1022A/B
Bruce Hammond

Chapter 22 Economic Growth March 26th 2013 The Basic of Economic Growth Trends - Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP over a given time or year-after-year increase in potential GDP. Economic growth rate- the annual percentage change in real GDP - The growth rate of real GDP tells us how quickly the totally economy is expanding - The standard of living depends on real GDP per person; which is real GDP divided by the population. So the contribution of real GDP growth to the change in the standard of living depends on the growth rate of real GDP per person  The growth rate of real GDP per person can also be calculated approximately by subtracting the populating growth rate from the real GDP growth rate  Real GDP per person grows only if real GDP grows faster than the population Rule of 70- states that the number of years it takes for the level of any variable to double is approximately How Potential GDP Grows - Labour, capital, land and entrepreneurship produce real GDP, and the productivity of the factors of production determines the quantity of real GDP that can be produced  the quantity of land is fixed and on any given day, the quantities of entrepreneurial ability and capital are also fixed and their productivities are given  The quantity of labour employed is the only variable factor of production  Potential GDP is the level of real GDP when the quantity of labour employed is at full employment Aggregate Production Function  less leisure= greater quantity of labour supplied and the greater quantity of real GDP produced  for each additional hour of labour, real GDP increases by less and less  Aggregate production function- the relationship that tells us how real GDP changes as the quantity of labour changes  An increase in the quantity of labour brings a movement up along the production function and an increase in real GDP Aggregate Labour Market The Demand for labour  quantity of labour hours employed and real GDP supplied  Real wage rate- the money wage rate divide by the price level. The real rage rate is the quantity of goods and services that an hour of labour earns.  Money wage rate is the number of dollars that an hour of labour earns  Real wage rate influences the quantity of labour demanded because what matters to firms is not the number of dollars they pay (money wage rate) but how much output they must sell to earn those dollars  Quantity of labour demanded increases as the real wage rate decreases The Supply of Labour  The real wage rate influences the quantity of labour supplied because what matters to households is not the number of dollars they earn (money wage rate) but what they can buy with those dollars  The quantity of labour supplied increases as the real wage rate increases - Potential GDP grows if the supply of labour increases or labour productivity increases Growth of the Supply of Labour  the quantity of labour is number of workers employed multiplied by average hours per worker; and the number employed equals the employment-to-population ratio multiplied by the working-age population  Quantity of labour changes as a result in  Average hours per worker  The employment-to-population ration  The working-age population ( in the long run, the working-age population grows at the same rate as the total population)  Does not change the demand for labour or the production function  Increase in the supply of labour and no change in demand the demand for labour , the real wage rate falls and the equilibrium quantity of labour increases . The increased quantity of labour produces more output and potential GDP increases  Population increase decreases potential GDP per hour of labour Growth of Labour Productivity  Labour productivity- the quantity of real GDP produced by an hour of labour.  When labour productivity grows, real GP person grows and brings a rising standard of living  The quantity of real GDP that any given quantity of labour can produce increases. If labour is more productive, f
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