Download Chapter 8 - Porterville College Home

© 2013, published by Flat World Knowledge
Published by:
Flat World Knowledge, Inc.
One Bridge Street
Irvington, NY 10533
© 2013 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is
subject to the License Agreement available
here http://www.flatworldknowledge.com/legal. No part of this work may be used,
modified, or reproduced in any form or by any means except as expressly permitted
under the License Agreement.
© 2013, published by Flat World Knowledge
1. THE SIGNIFICANCE OF
ECONOMIC GROWTH
Learning Objectives
1. Define economic growth and explain it using
the production possibilities model and the
concept of potential output.
2. State the rule of 72 and use it to show how
even small differences in growth rates can
have major effects on a country’s potential
output over time.
3. Calculate the percentage rate of growth of
output per capita.
© 2013, published by Flat World Knowledge
1.1 Defining Economic
Growth
• The three key points about economic growth
− Growth is a process; it is an unfolding series
of events.
− Growth is defined in terms of the economy’s
ability to produce goods and services as
indicated by its level of potential output.
− A discussion of growth is a discussion of the
series of events that increase the economy’s
ability to produce goods and services.
© 2013, published by Flat World Knowledge
1.1 Defining Economic
Growth
© 2013, published by Flat World Knowledge
1.1 Defining Economic
Growth
© 2013, published by Flat World Knowledge
1.2 The Rule of 72 and
Differences in Growth Rates
•
•
Exponential growth occurs when a
quantity grows at a given percentage rate.
The rule of 72 states that a variable’s
approximate doubling time equals 72
divided by the growth rate, stated as a
whole number.
y
dou
to
ear

72
/
gro
ra
pe
y
© 2013, published by Flat World Knowledge
Differences in Growth Rates: 3.5%
growth vs. 2.4% growth
Real GDP, 3.5
percent growth
Third
doubling
Second
doubling
First
doubling
Second
doubling
First
doubling
© 2013, published by Flat World Knowledge
Real GDP, 2.4
percent growth
1.3 Growth in Output per
Capita
•
Output per capita is real GDP per person.
EQUATION 1.1
Output per capita = real GDP
N
EQUATION 1.2
% rate of growth of output per capita ≈
% rate of growth of output - % rate of growth of
population
© 2013, published by Flat World Knowledge
2. GROWTH AND THE LONG-RUN
AGGREGATE SUPPLY CURVE
Learning Objectives
1. Explain and illustrate graphically the
concept of the aggregate production
function. Explain how its shape relates to
the concept of diminishing marginal returns.
2. Derive the long-run aggregate supply curve
from the model of the labor market and the
aggregate production function.
3. Explain how the long-run aggregate supply
curve shifts in responses to shifts in the
aggregate production function or to shifts in
© 2013, published by Flat World Knowledge
the demand for
or supply of labor.
2. GROWTH AND THE LONG-RUN
AGGREGATE SUPPLY CURVE
LRAS2
LRAS3
Y1
Y2
Y3
LRAS4
Price level
LRAS1
Real GDP
© 2013, published by Flat World Knowledge
Y4
2.1 The Aggregate Production
Function
•
•
The Aggregate production function is a
function that relates the total output of an
economy to the total amount of labor
employed in the economy, all other
determinants of production (capital, natural
resources, and technology) being
unchanged.
Diminishing marginal returns refers to a
situation that occurs when additional units
of a variable factor add less and less to total
output, given constant quantities of other
factors.
© 2013, published by Flat World Knowledge
2.1 The Aggregate Production
Function
•
The Aggregate production function shows that
increases in employment lead to increases in
output but at a decreasing rate.
C
B
A
© 2013, published by Flat World Knowledge
PF
2.2 The Aggregate Production Function,
the Market for Labor, and Long-Run
Aggregate Supply
•
Productivity is the amount of output per
worker
Productivity = Quantity/Labor
© 2013, published by Flat World Knowledge
2.2 The Aggregate Production Function,
the Market for Labor, and Long-Run
Aggregate Supply
Deriving the Long-Run Aggregate Supply
© 2013, published by Flat World Knowledge
3. DETERMINANTS OF ECONOMIC
GROWTH
Learning Objectives
1. Discuss the sources of economic growth.
2. Discuss possible reasons why countries
grow at different rates.
© 2013, published by Flat World Knowledge
3.1 The Sources of Economic Growth
Economic growth occurs as an outward shift
in the production possibilities curve and as a
shift to the right in long run aggregate
supply.
• Sources of growth in the U.S. in the 20th
century
– Increased labor and physical capital
– Improvements in factor of production
quality and technology
•
© 2013, published by Flat World Knowledge
3.2 Explaining Recent Disparities in
Growth Rates
•
•
•
There has been a growing disparity in the rates
of economic growth in industrialized countries
in the last decade which may reflect various
differences in economic structures and policies.
For OECD_24 countries, standard deviation of
GDP per capita growth increased in the last two
decades of the 20th century
– Standard deviation 1980-1990 was 0.74
– Standard deviation 1990-2000 was 1.17
If we just look at the last 4 years of the 20th
century we see an even larger standard
deviation.
© 2013, published by Flat World Knowledge
– Standard deviation
1996-2000 was 1.37