Economic growthCh. 11, p. 293-300

What is economic growth? How can it be measured?How can growth be shown on a PPC model? An AD-AS model?Why does growth matter?What happens when inflation plays a part in the economy? Deflation?

Economic growth

• Economic growth is an increase in real GDP, or the real quantity of goods/services produced over a period of time (usually a year)

• Expressed as:– % change in real GDP over period of time– % change in real GDP per capita over period of time

• Growth in real GDP (rGDP)≠rGDP per capita– rGDP measures total output of an economy

• Eliminates impact of price changes (as opposed to nominal)

– rGDP per capita measures total output per person• This is a better indicator of the standard of living of a population

Calculating economic growth

Basic equation/formula:

%ΔrGDP= rGDP2-rGDP x100

rGDP

If the US rGDP in 2011 was $15.24 trillion and $15.54 trillion in 2012, by how much did rGDP grow?

Why does growth matter?

• The growth rate can have a serious impact on the economic performance of a country in the long run, effecting both rGDP and rGDP per capita

• Compare: 3 countries with same starting GDP per capita in 2010 (let’s say, $10000) and three different growth rates: 7.2%, 2.5%, and -1.4%. By 2020, how different will the rGDP per capita be?

Growth and the PPC

• Growth is an increase in actual output caused by factors such as reduction in unemployment, increases in efficiency, etc (AS shifters)

• Leads to a movement of a point inside the PPC to a point closer to the PPC– Remember that on the

PPC, we assume that there is NO unemployment

– Further away from PPC, greater unemployment of resources and inefficiency of production (reductions in these two can cause limited growth of actual output)

Growth and the PPC• Outward shifts of PPC:

– Increase in quantity of resources– Improvements in quality of

resources

• As prod. poss. increase, economy must make efforts to keep unemployment low and reduce inefficiency to make sure output continues to grow

• PPC can also shift inward, showing decrease in production possibilities

• Outward/inward shift does not have to be parallel; as some resources may be in greater supply than others

Investment and economic growth

• Investment: spending on resources undertaken to create a future stream of benefits

• Increases in quantity and improvement in quality of physical capital (investment in physical capital and new tech) are important to growth in the long term

• Investment is crucial to building capital of any type

Three types of resources:• Physical

– Machinery, tools, infrastructure

• Human– Labor, skills, abilities,

education, traning, health care (anything affecting levels of education/health)

• Natural– Land/natural resources;

primary commodities, overall natural environment/ecosystem(s)

Key points

• Increased quantities of labor does not really help growth in the long run, but improvements in quality of labor (from investment in human capital) can have a significant effect on growth

• Marketable commodity-type natural resources can contribute to economic growth, but are not essential to it. Investing in sustainable measures, and in the quality/quantity of these resources can help with growth in the long run.

• In order to have long term economic growth, some consumption must be sacrificed in the short term to make new investments resulting in new capital for use in the future.

Growth and the LRAS (AD-AS) model (p. 300)

Increase in potential output signifies growth in long-term; decrease signals fall in real output.

Factors that cause long-term growth (LRAS and AS curve shift right; outward PPC shifts):

• Increases in quantities of FoP• Improvements in resource quality • Improvements in technology• Increase in efficiency

– Institutional change (effect on use of scarce resources/quantity of output produced…)