Econ 1010 chapter 22
- Economic growth rate is the annual percentage change of real GDP.
RealGDp∈current year−RealGDp∈previous year
- Real GDp per person or per capita, is the real GDp divided by the population and
measures the change in standard of living as it depends on the growth rate of
real GDP per person. Real GDP per person is calculated through the division of
real GDP by the population.
- If growth rate of the population exceeds the growth of real GDp then real GDp
per person falls.
- Compound interest – the interest rate is on both the principle and its respective
interests developed in a given amount of years.
o Rule of 70 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.
- Canada had 81 years of 2.1 skowest in 1980s and fastest in 1940s.
- Economic growth is a sustained year after year increases in potential GDP. And
to develop the potential GDp
o The aggregated production function – is the relationship that tell us how
real GDp changes as the quantity of labour changes as the quantity of
labour changes when all other influences on production remain the same.
The more leisure we forgo the more Real GDp we can produce, however,
there will be a tendency to decrease the rate of increase for real GDP as
work hours progress.
o The aggregated labour market – the quantity of labour hours employed
and the quantity of real GDp supplied.
The demand for labour – relationship between quantity of labour
demanded and real wage rate. The quantity of labour demanded
is the number of all labour hours hired by all the firms in the
economy during a period. And this demands on the real wage
Real wage rate – the money price or nominal wage divided by the
price level. It is the goods and services that an hour of labour
earns. This is important as the determinate for the factory is how
much product they must sell to sustain their labour. The quantity of labour demanded increases as the real wage rate decreases. This
is the law of diminishing returns as the firms will hire more labour
onloy if the real wage rate falls to match the fall in the extra output
produced by the given labour.
The supply of Labour – the relationship between the quantity of
labour supplied and the real wage rate. The relationship is positive
as people want to earn more as the wage rate increases and thus
work longer hours.
Labour market equilibrium – when the demand and supply of
labour are equal. This forces the wage rate down when there is a
labour surplus and forces the wage rate up when there is a labour
deficit. And thus, eventually the labour market will be in
equilibrium. At this equilibrium real wage rate and level of
employment, the economy is at full employment.
o Potential GDP – the real GDp at full employment is the potential GDp and
at this level we can determine the GDp produced at the market
- The growth of GDp
o Growth of the supply labour – when the supply of labour grows the supply
labour curve shifts upwards. The quantity of labour is the number of
worker employed multipled by average hours per worker. And the number
employed equals the employment to population ratio multiplied bu the
working age population. Thus quantity of labour will change due to
Average hours per worker
The employment to population ratio
The working population.
In the long run the working age population grows at the same rate
as the total population
o The effects of population growth – the increase in supply of labour with a
constant demand will force the wage rate to decrease and thus increasing
the quantity demand of labour and thus the real GDp. This however
decreases the potential GDP per hour of labour due to the diminishing
o Growth of labour productivity Labour productivity is the quantity of real GDp produced by an
hour of labour. IT is calculated by dividing real GDp by aggregated
Effects of increase in labour productivity - when the productivity of
labour increases, the real GDp will increase for the same amount
of workers. Consequently, the demand for workers will increase
due to better productivity. With a constant worker supply and a
higher demand, it is apparent that the wage will increase. The
increase in aggregate labour hours is a consequence of an
increase in labour productivity.
- Preconditions for labour productivity growth
o Physical capital growth – the fixed capital of the firm or plant. As the
amount of capital increases per worker, they will become more productive
due to the increase in resources and produce in much higher efficiency.
o Human Capital Growth – the act of learning and acuminating skill and
knowledge of human beings. This can be done through a set capital but
with repetitive work and observing new methods of production, the
productivity of workers can increase without any form of increase on fixed
o Technological advances – the discovery and the application of new
technologies to foster and increase worker efficiency. This creates a
generational change that were not known before, but it depends on the
increase in capital as the older technology must be replaced to reap the
benefits of the new capital.
o Change in average hours per worker, change in employment-to-
population ratio, and working age population growth links to labour supply
o Physical capital growth, human capital growth in education and training,
and job experience, as well as technological advances contribute to
labour productivity growth.
- Growth accounting , a tool that calculates the quantitative contribution to labour
productivity growth of each of its sources.
o The Canadian production function – center for the Study of living
standards (CSLS) estimated that a 1 percent increase in capital per hour
of labour brings a 0.49 percent increase in labour productivity. And the
rest will be due to technological change. o Accounting for the productivity growth slowdown and speedup – between
1961 and 1973 labour productivity grew by 3 percent a year and capital
growth contributed about one-third of this growth. Between 1973 and
1985, labour productivity growth slowed to 1.5 percent a year and
between 19875 and 1993 it slowed more to 0.5 percent. The increase in
capital and technological growth continued but the external factors such
as energy crisis and other problems hindered the growth from its
potential. Changes in pace of technological