Macro chapter 8

What reflects reflect various differences in economic structures and policies?

...•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

As we have learned, there are two ways to model economic growth:

1) as an outward shift in an economy's production possibilities curve, and (2) as a shift to the right in its long-run aggregate supply curve.

•The main sources of growth for the United States from 1948 to 2002 were divided between what? Since 1995, however, WHAT have been the main drivers of economic growth in the United States.

1) increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and technology (about 40%). 2) improvements in factor quality and technology

•wHAT implies exponential growth. When something grows exponentially, it _over fixed intervals of time; these intervals may be computed using _

1)Growth of a quantity at a particular percentage rate 2) DOUBLES 3) the rule of 72

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.

1)variable growing at some exponential rate doubles over fixed intervals of time. The doubling time is given by the rule of 72, which states that a variable's approximate doubling time equals 72 divided by the growth rate, stated as a whole number. 2)Over time, small differences in growth rates create large differences in incomes. An economy growing at a 3.5% rate increases by 3.5% of its initial value in the first year. In the second year, the economy increases by 3.5% of that new, higher value. In the third year, it increases by 3.5% of a still higher value. When a quantity grows at a given percentage rate, it experiences exponential growth. A variable that grows exponentially follows a path such as those shown for potential output in Figure 8.1 "A Century of Economic Growth" and Figure 8.2 "Cyclical Change Versus Growth". These curves become steeper over time because the growth rate is applied to an ever-larger base. 3)

There are three key points about economic growth to keep in mind:

1.Growth is a process. It is not a single event; rather, it is an unfolding series of events. 2.We define growth in terms of the economy's ability to produce goods and services, as indicated by its level of potential output. 3.Growth suggests that the economy's ability to produce goods and services is rising. A discussion of economic growth is thus a discussion of the series of events that increase the economy's ability to produce goods and services.

1.Define economic growth and explain it using the production possibilities model and the concept of potential output?

1.Growth is a process. It is not a single event; rather, it is an unfolding series of events. 2.We define growth in terms of the economy's ability to produce goods and services, as indicated by its level of potential output. 3.Growth suggests that the economy's ability to produce goods and services is rising. A discussion of economic growth is thus a discussion of the series of events that increase the economy's ability to produce goods and services. Economic growth is a long-run process that occurs as an economy's potential output increases. An increase in potential output thus implies an outward shift in the production possibilities curve.

% of rate of growth of output per capita

= % rate growth of output-%rate

an increase in the supply of labor,

Another event that can shift the long-run aggregate supply curve

why is it important to gain a deeper understanding of what determines long-run aggregate supply (LRAS).

Because economic growth can be considered as a process in which the long-run aggregate supply curve shifts to the right, and because output tends to remain close to this curve,

how do you calculate the cyclcical fluctuations

One way to do this is to select years in which the economy was operating at the natural level of employment and then to compute the annual rate of change between those years

1.Discuss the sources of economic growth

There we learned that the main sources of growth for the United States from 1948 to 2002 were divided between increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and technology (about 40%

Diminishing marginal returns occur when

additional units of a variable factor add less and less to total output, given constant quantities of other factors.

The position of the long-run aggregate supply curve is determined by the

aggregate production function and the demand and supply curves for labor.

tells us why we use _, rather than actual real GDP, as our measure of economic growth. Actual values of real GDP are affected not just by changes in the potential level of output but by

changes in potential output, the cyclical fluctuations about that level of output

The increase in the supply of labor does not change the stock of capital or natural resources, nor does it change technology—it therefore

does not shift the aggregate production function.

The report hypothesizes that lower start-up costs and less strict labor market regulations may

encourage U.S. entrepreneurs to enter a market and then to expand, if warranted. European entrepreneurs may be less willing to experiment in a market in the first place.

The increase in the real wage reflects

enhanced productivity

the amount of output per worker

enhanced productivity

When a quantity grows at a given percentage rate, it experiences what

exponential growth

In drawing the aggregate production function, the amount of labor varies, but everything else that could affect output, specifically the quantities of other factors of production and technology, is what?

fixed

In order to devote resources to increasing physical and human capital and to improving technology—activities that will enhance future production—society must

forgo using them now to produce consumer goods.

We use output per capita as a

gauge of an economy's material standard of living

The higher output is a reflection of a

higher natural level of employment, along with the fact that labor has become more productive as a result of the technological advance.

Of course, the aggregate production function and the supply curve of labor can shift together, producing

higher real wages at the same time population rises.

Economic growth occurs only

if an event shifts the economy's production function or if there is an increase in the demand for or the supply of labor.

An increased supply of labor could result from

immigration, an increase in the population, or increased participation in the labor force by the adult population.

An increase in potential output thus implies an outward shift

in the production possibilities curve.

•The real wage and the natural level of employment are determined by

intersection of the demand and supply curves for labor.

•Other factors associated with more growth include:

investments in physical and human capital, sound macroeconomic policies (especially low inflation), private sector research and development, trade exposure, and better developed financial markets.

Economic Growth

is the process through which an economy's production possibilities curve shifts outward. We measure it as the rate at which the economy's potential level of output increases.

•Small differences in rates of economic growth can lead to

large differences in levels of potential output over long periods of time

short-run changes in real GDP say

little about economic growth

•With qualifications, the study found that strict regulation of product markets (for example, regulations that reduce competition) and strict employment protection legislation (for example, laws that make hiring and firing of workers more difficult) had

negative effects on growth.

•All countries show a large number of firms entering and exiting markets. But, a key difference between the United States and Europe is that

new firms in the United States start out smaller and less productive than those of Europe but grow faster when they are successful.

technological gains or increases in the stock of capital

new jobs become available and they generally offer higher wages. The demand for labor rises.

Real gDP per person

outa per cAPITA

The shape of the aggregate production function shows that as employment increases

output increases, but at a decreasing rate

Our model of long-run aggregate supply tells us that in the long run, What are determined by the economy's production function and by the demand and supply curves for labor.

real GDP, the natural level of employment, and the real wage

Outta per capita

real gdp/N

•In general, countries with accelerating per capita growth rates also experienced significant increases in employment, while those with stagnant or declining employment generally experienced

reductions in per capita growth rates.

An aggregate production function

relates the total output of an economy to the total amount of labor employed in the economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged

Changes in real GDP from quarter to quarter or even from year to year are ?

short-run fluctuations that occur as aggregate demand and short-run aggregate supply change.

It is that level of potential output that determines the position of

the long-run aggregate supply curve

This output level is the same as that shown by

the long-run aggregate supply curve.

Potential output is given by

the point on the aggregate production function corresponding to the natural level of employment.

In the long run, economic activity moves

toward its level of potential output

•Economic growth can be shown as a series of shifts to the right in LRAS. Such shifts require either

upward shifts in the production function or increases in demand for or supply of labor.

•Enhancements in human capital contributed to labor productivity and economic growth, but in slower growing countries such improvements

were not enough to offset the impact of reduced or stagnant labor utilization.

The aggregate production function relates what to what

•The aggregate production function relates the level of employment to the level of real GDP produced per period.

3.Calculate the percentage rate of growth of output per capita

•To assess changes in average standards of living, we subtract the percentage rate of growth of population from the percentage rate of growth of output