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EC140 (329)
Chapter 22

Chapter 22 EC140.docx

6 Pages
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Department
Economics
Course Code
EC140
Professor
Angela Trimarchi

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EC140 Chapter 22 – Economic Growth Week 9 The Basics of Economic Growth -Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP over a given period -Slow economic growth or the absence of growth can condemn a nation to devastating poverty and vice versa Calculating Growth Rates -The economic growth rate is the annual percentage change of real GDP: Real GDP growth rate = Real GDP in current year – Real GDP in previous year x 100 Real GDP in previous year -The standard of living depends on real GDP per person, which is real GDP divided by the population The Magic of Sustained Growth -Sustained growth of real GDP per person can transform a poor society into a wealthy one How Potential GDP Grows -Economic growth occurs when real GDP increases -Economic growth is a sustained, year-after-year increase in potential GDP How Potential GDP is Determined -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 -To determine potential GDP, we use: -The aggregate production function -The aggregate labour market The Aggregate Production Function -The relationship that tells us how real GDP changes as the quantity of labour changes when all other influences on production remain the same The Aggregate Labour Market -Determines the quantity of labour hours employed and the quantity of real GDP supplied EC140 Chapter 22 – Economic Growth Week 9 The Demand for Labour -The relationship between the quantity of labour demanded and the real wage rate -The real wage rate is the money (or nominal) wage rate divided by the price level -The quantity of labour demanded increase as the real wage rate decreases The Supply of Labour -The relationship between the quantity of labour supplied and the real wage rate -The real wage influences the quantity of labour supplied because what matters to households is not the number of dollars they earn but what they can buy with those dollars -The quantity of labour supplied increases as the real wage rate increases Potential GDP EC140 Chapter 22 – Economic Growth Week 9 What makes Potential GDP Grow? -Divide all the forces that make potential GDP grow into two categories: -Growth of the supply of labour -Growth of labour productivity Growth of the Supply of Labour -When the supply of labour grows, the supply of labour curve shifts rightward -The quantity of labour at a given real wage rate increases -The quantity of labour changes as a result of changes in: -Average hours per worker -The employment-to-population ratio -The working-age population EC140 Chapter 22 – Economic Growth Week 9 The Growth of Labour Productivity -The quantity of real GDP produced by an hour of labour EC140
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