hw micro and macro economy

Macroeconomics Chapter 17: Growth and Productivity: Long-Run Possibilities Instructor: C. Speranzo

Chapter 17: Growth and Productivity: Long-Run Possibilities

LO 1: The principal sources of economic growth

LO 2: The policy tools for accelerating growth

LO 3: The pros and cons of continued growth

The Nature of Growth

Production possibilities - the alternative combinations of final goods/services that could ne produced in a given time period with all available resources and technology

Economic Growth – an increase in output (real GDP); an expansion of production possibilities

Real GDP – the value of final output produced in a given period adjusted for changing process

Base year – the year used for comparative analysis; the basis for indexing price changes

Growth rate - % change in real output from one period to another

Exponential process – the cumulative process, whereby interest or growth is compounded from one year to the next

GDP per capita - total GDP divided by total population; average GDP

Growth in GDP per capita is attained only when the growth of output exceeds population growth.

Labor force- all persons over age 16 who are either working for pay or actively seeking paid employment

Employment rate – the % of the adult population that is employed

Productivity – output per unit of input – for example, output per labor – hour

Sources of Growth

Growth rate of total output = growth rate of labor force + growth rate of productivity

The sources of productivity gains include:

· Higher skills – an increase in labor skills

· More capital – an increase in the ratio of capital to labor

· Technological advance – the development and use of better capital equipment and products

· Improved management – better use of available resources in the production process

Human Capital - the knowledge and skills possessed by the workforce

Net investment – gross investment less depreciation

A steady stream of inventions and innovations advances worker productivity, raising the potential for continued economic growth.

High levels of national debt may raise interest rates and crowd out investments that promote economic growth.

Malthusian Formula for Destruction – 18th century warnings of Rev. Thomas Malthus – argued that continued growth was impossible because food production couldn’t keep pace with population growth. His dire projections earned the economics profession is characterization as the “dismal science.”

With population increasing at geometric rate, food supplies at arithmetic rate outcome inevitable

Geometric growth – an increase in quantity by a constant proportion each year,

Arithmetic growth - an increase in quantity by a constant amount each year.

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