Economic growth: Expansion of production possibilities measured as the increase in real GDP over time
Economic growth rate:
o Annual percentage change of real GDP
o Shows how rapidly the total economy is expanding (useful for analyzing the balance between countries)
Economic growth rate per person:
o Real GDP per person: Real GDP divided by population
o Economic growth rate per person:
o Grows only when real GDP grows faster than the population grows. Otherwise, it falls.
o (Also calculated by subtracting the population growth rate from the real GDP growth rate)
Rule of 70: Formula that states that the number of years it takes for the level of any variable to double is
approximately 70 divided by the annual percentage growth rate of the variable.
Economic Growth Trends
Between 1926 and 2010, the average real GDP per person growth rate has been 2% per year.
1930s: Enormous fall in real GDP due to the Great Depression
1940s: Bulge due to economic activities during World War II
1950s: Slow growth
1960s: Growth rate sped up and averaged to 3.3% per year.
1970s: Growth rate slow down to 2.2% per year.
1980s: Growth rate slow down further to 0.7% per year.
1990s+: Growth rate increases again, but has been unsuccessful in reaching its long-term average.
Potential GDP Growth
Potential GDP: The level of real GDP when the quantity of labour employed is at full-employment quantity.
o (Out of labour, capital, land, and entrepreneurship, labour is the only variable factor of production)
o Aggregate production function: Relationship that tells us how real GDP changes as the quantity of
labour changes when all other influences on production remain the same.
Each additional hour of leisure forgone increases real GDP in successively smaller amounts.
Increase in the quantity of labour (and corresponding decrease in leisure) brings a movement
along the production function, and an increase in real GDP. o Aggregate labour market:
Demand for labour: Relationship between quantity of labour demanded and the real wage rate
Quantity of labour demanded:
o Hours of labour demanded by all the firms in the economy in a given period.
o Depends on the price of labour (real wage rate)
Real wage rate:
o Money wage rate divided by price level
o Quantity of goods and services that an hour of labour earns.
o Firms care not about the amount they must pay, but about how much output
they must sell to earn them.
o Quantity of labour demanded increases as the real wage rate decreases. Due
to diminishing returns, firms hire more labour only if the real wage rate falls
to match the fall in the extra output produced by that labour.
Money wage rate: Number of dollars that an hour of labour earns.
Supply of labour:
Relationship between the quantity of labour supplied (number of labour hours that all
households in the economy plan to work in a given time) and the real wage rate.
Quantity of labour supplied increases as the real wage rate increases.
Labour market equilibrium:
A shortage of labour causes the real wage rate to rise to eliminate it.
A surplus of labour causes the real wage rate to drop to eliminate it.
When there is neither a shortage nor surplus, there is full-employment equilibrium.
At equilibrium quantity, potential GDP equals real GDP.
Potential GDP growth is caused by:
o Growth of the supply of labour:
Quantity of labour: Number of workers employed (employment to population ratio multiplied
by the working age population) multiplied by average hours per worker
When the supply of labour grows, the supply of labour curve shifts rightward, and the
quantity of labour at a given real wage rate increases.
Quantity of labour can change as a result of chang