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Chapter 22

# Econ 1010 chapter 22

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Department
Economics
Course Code
ECON 1000
Professor
Rebecca Jubis

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Econ 1010 chapter 22 - Economic growth rate is the annual percentage change of real GDP. RealGDp∈current year−RealGDp∈previous year realGDPgrowthrate= x100 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 rate.  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 equilibrium. - 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 returns. 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 labour hours.  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 capital. 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 growth. 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
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