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Chapter 22

Chapter 22 Textbook Notes

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Western University
Economics 1022A/B
Jeannie Gillmore

Econ Chapter 22 Notes January 23 The Basics of Economic Growth y Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP over a given period y Rapid economic growth maintained over a number of years can transform a poor nation into a rich one Calculating Growth Rates y Economic growth rate the annual percentage change of real GDP y Real GDP growth rateReal GDP in current yearReal GDP in previous yearX 100 Real GDP in previous year y The growth rate of real GDP tells us how rapidly the TOTAL economy is expanding o Useful for telling us about potential changes in the balance of economic power among nations o Doesnt tell us about changes in the standard of living y Real GDP per person also called per capita real GDP real GDP divided by the population o Standard of living depends on this y The contribution of real GDP growth to the change in the standard of living depends on the growth rate of real GDP per person y We use the above formula to calculate this growth rate replacing real GDP with real GDP per person y The growth rate of real GDP per person can also be calculated approximately by subtracting the population growth rate from real GDP growth rate y Real GDP per person grows only if real GDP grows faster than the population grows The Magic of Sustained Growth y Sustained growth of real GDP per person can transform a poor society into a wealthy one because economic growth is like compound interest y Compound interest o If you put 100 in your account and get 5 interest then the next year you will earn interest from 105 you are earning interest from your interest Applying the Rule of 70 y The rule of 70 applies to any variable so it applies to real GDP per person y figure 221 shows the doubling time for growth rates of 1 percent per year to 12 percent per year o Shows that real GDP per person doubles in 70 years 70 divided by 1an average life spanif the growth rate is 1 percent per year o It double in 35 years if the growth rate is 2 percent a yearEconomic Growth Trends Growth in the Canadian Economy y figure 222 shows real GDP per person in Canada for the 81 years from 1926 to 2007 Real GDP Growth in the World Economy y Real GDP per person has grown throughout the world y Real GDP per person has grown slightly faster in the United States than in Canada and the four big countries of Europe y Central and South America was growing more quickly than Canada during the 1960s but slumped during the early 2000s before increasing againy Even modest differences in economic growth rates sustained over a number of years bring enormous differences in the standard of living How Potential GDP Grows y Economic growth occurs when real GDP increased y A oneshot rise in real GDP or a recovery from recessions isnt economic growth y Economic growth is a sustained year after year increase in potential GDP How Potential GDP is Determined y 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 y Potential GDP is the level of real GDP when the quantity of labour employed is the fullemployment quantity y To determine potential GDP we use a model with two components o The aggregate production function o The aggregate labour market The Aggregate Production Function y PPF is the boundary between the combinations of goods and services that can be produced and those that cannot y Think of real GDP as a number of big shopping carts o each cart contains some of each kind of different gods and services produced and one carload of items costs 1 billion
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