Economic growth
The basis of economic growth
Economic growth is a sustained expansion of production possibilities measured as the increase in
real GDP over a given period
Why do some companies stagnate in their growth and others excel in growth?
Calculating growth rates
Economic growth rate is the annual percentage change of real GDP.
REAL GDP growth rate = REAL GDP CURRENT YEAR – REAL GDP PREVIOUS YEAR
/
REAL GDP in PREVIOUS YEAR
X
100 %
The growth rate tells us how rapidly the economy is expanding. The real GDP growth rate measures
he potential changes in the balance of economic power among nations. But it does not tells us about
changes in the standard of living. That depends on real GDP per person which is real GDP divided by
the population. So the contribution of real GDP growth to the change in the standard of living
depends on the growth rate of real GDP per person. Use two real GDP per person values with the
growth formula above to calculate the growth rate of real GDP per person. The growth rate of real
GDP per person can also be calculated approximately by subtracting the population growth rate
from the real GDP growth rate. Real GDP per person grows only if real GDP grows faster than the
population grows. If the growth rate of the population exceeds the growth of real GDP, real GDP per
person falls.
The magic of sustained growth
Compound interest
Rule of 70 which states that 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.
Economic growth trends
How fast is our economy growing? How fast are other economies growing? Are poor countries
catching up to rich ones, or do the gaps between the rich and poor persist or even widen? A major
goal of this chapter is to explain why our economy grows and why the long-term growth rate varies.
Another goal is to explain variations in the economic growth rate across countries. Let’s look at some
facts about other countries’ growth rates. What are the preconditions for economic growth and what
sustains it? How can we identify the sources of economic growth and measure the contribution that
each source makes? What can we do to increase the sustainable rate of economic growth?
, Red line = real GDP (circles around)
Black line = potential GDP. (linear mostly)
The trend in potential GDP per person tells us about economic growth. Fluctuations around potential
GDP tells us about the business cycle.
How potential GDP grows?
What determines potential GDP?
Labour, capital, land and entrepreneurship produce real GDP, and the productivity of the factors of
production determines the quantity of real GDP that can be produced. Land, capital and
entrepreneurship are fixed factors and labor is a variable factor.
- An aggregate production function
- An aggregate labour market
Aggregate production function
Production possibilities frontier is the boundary between the combinations of goods and services
that can be produced and those that cannot. We are going to think about the production possibilities
frontier for two special goods; real GDP and the quantity of leisure time. Real GDP are like big
shopping carts each unit contains a certain value. The quantity of leisure tie is the number of hours
spent not working.
- The aggregate production function is the relationship that tells us how real GDP changes as
the quantity of labour changes when all other influences on production remain the same.
This relationship – the curve. An increase in the quantity of labour (and a corresponding decrease in
leisure hours) brings a movement along the production function and an increase in real GDP.
Aggregate labour Market
In macroeconomics, we pretend that there is one large labour market that determines the quantity
of labour employed and the quantity of real GDP produced. To see how this aggregate labour market
works, we study the
- Demand for labour
- The supply for labour
- Labour market equilibrium
The demand for labour
- The demand for labour is the relationship between the quantity of labour demanded and the
real wage rate.
- The quantity of labour demanded is the number of labour hours hired by all the firms in the
economy during a given period.
- The quantity depends on the price of labour, which is the real wage rate.
- The real wage rate influences the quantity of labour demanded because what matters to
firms is not the number of pounds they pay but how much output they must sell to earn
those pounds.
The real wage rate is the quantity of goods and services that an hour of labour earns. It
contrast with the money wage rat, which is the number of pounds that an hour of labour
earns. The real wage rate is calculated by dividing the money wage rate by the price level
The quantity of labour demanded increases as the real wage rate decreases.
The basis of economic growth
Economic growth is a sustained expansion of production possibilities measured as the increase in
real GDP over a given period
Why do some companies stagnate in their growth and others excel in growth?
Calculating growth rates
Economic growth rate is the annual percentage change of real GDP.
REAL GDP growth rate = REAL GDP CURRENT YEAR – REAL GDP PREVIOUS YEAR
/
REAL GDP in PREVIOUS YEAR
X
100 %
The growth rate tells us how rapidly the economy is expanding. The real GDP growth rate measures
he potential changes in the balance of economic power among nations. But it does not tells us about
changes in the standard of living. That depends on real GDP per person which is real GDP divided by
the population. So the contribution of real GDP growth to the change in the standard of living
depends on the growth rate of real GDP per person. Use two real GDP per person values with the
growth formula above to calculate the growth rate of real GDP per person. The growth rate of real
GDP per person can also be calculated approximately by subtracting the population growth rate
from the real GDP growth rate. Real GDP per person grows only if real GDP grows faster than the
population grows. If the growth rate of the population exceeds the growth of real GDP, real GDP per
person falls.
The magic of sustained growth
Compound interest
Rule of 70 which states that 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.
Economic growth trends
How fast is our economy growing? How fast are other economies growing? Are poor countries
catching up to rich ones, or do the gaps between the rich and poor persist or even widen? A major
goal of this chapter is to explain why our economy grows and why the long-term growth rate varies.
Another goal is to explain variations in the economic growth rate across countries. Let’s look at some
facts about other countries’ growth rates. What are the preconditions for economic growth and what
sustains it? How can we identify the sources of economic growth and measure the contribution that
each source makes? What can we do to increase the sustainable rate of economic growth?
, Red line = real GDP (circles around)
Black line = potential GDP. (linear mostly)
The trend in potential GDP per person tells us about economic growth. Fluctuations around potential
GDP tells us about the business cycle.
How potential GDP grows?
What determines potential GDP?
Labour, capital, land and entrepreneurship produce real GDP, and the productivity of the factors of
production determines the quantity of real GDP that can be produced. Land, capital and
entrepreneurship are fixed factors and labor is a variable factor.
- An aggregate production function
- An aggregate labour market
Aggregate production function
Production possibilities frontier is the boundary between the combinations of goods and services
that can be produced and those that cannot. We are going to think about the production possibilities
frontier for two special goods; real GDP and the quantity of leisure time. Real GDP are like big
shopping carts each unit contains a certain value. The quantity of leisure tie is the number of hours
spent not working.
- The aggregate production function is the relationship that tells us how real GDP changes as
the quantity of labour changes when all other influences on production remain the same.
This relationship – the curve. An increase in the quantity of labour (and a corresponding decrease in
leisure hours) brings a movement along the production function and an increase in real GDP.
Aggregate labour Market
In macroeconomics, we pretend that there is one large labour market that determines the quantity
of labour employed and the quantity of real GDP produced. To see how this aggregate labour market
works, we study the
- Demand for labour
- The supply for labour
- Labour market equilibrium
The demand for labour
- The demand for labour is the relationship between the quantity of labour demanded and the
real wage rate.
- The quantity of labour demanded is the number of labour hours hired by all the firms in the
economy during a given period.
- The quantity depends on the price of labour, which is the real wage rate.
- The real wage rate influences the quantity of labour demanded because what matters to
firms is not the number of pounds they pay but how much output they must sell to earn
those pounds.
The real wage rate is the quantity of goods and services that an hour of labour earns. It
contrast with the money wage rat, which is the number of pounds that an hour of labour
earns. The real wage rate is calculated by dividing the money wage rate by the price level
The quantity of labour demanded increases as the real wage rate decreases.
