Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 24: Economic Growth - Coggle Diagram
Chapter 24: Economic Growth
Economic growth
The
sustained
expansion of production possibilities measured as the
increase in real GDP over a given period.
sustained economic growth has the power to turn a poor economy into a wealthy one
recovery from a recession or a once off increase is not economic growth
Calculating economic growth rates
economic growth is expressed as the
annual % change of RGDP
RGDP growth rate = (RGDP in current year - RGDP in previous year) ÷ RGDP in previous year * 100
value can tell us how rapidly the total economy is expanding, doesn't tell us about standard of living
changes in standards of living depend on
RGDP per capita
RGDP per capita = RGDP ÷ population
RGDP per person only grows if RGDP grows faster than the population grows
RGDP per capita also equal to: population growth - RGDP growth rate = RGDP per capita growth rate
Determining potential GDP
• The factors of production produce RGDP and the productivity of these factors determines the quantity of RGDP that can be produced (potential GDP)
•since labour is the only variable factor of production,
potential GDP is the level of RGDP at full employment quantity
• Potential GDP determined using two components:
Aggregate production function
&
Aggregate labour function
Aggregate production function
like PPF, shows us how RGDP changes as the quantity of labour (labour hours worked) changes when when all influences on production remain the same
RGDP increases at a decreasing rate as quantity of labour increases (and leisure hours decreases)
Aggregate labour market
Demand for labour and the real wage rate
demand for labour is the relationship between
quantity of labour demanded
(# of labour hours hired by all firms during a period) & the
real wage rate
real wage rate is the quantity of goods and services that an hour of labour earns.
real wage rate =
money wage rate
÷
price level
.
real wage rate influences the quantity of labour demanded as it determines how much output a firm can gain.
quantity of labour demanded increases as the real wage rate decreases (∴ labour demand curve slopes downwards) due to diminishing returns
Supply of labour
relationship between quantity of labour supplied and the real wage rate.
quantity of labour supplied is the number of labour hours that all households plan to work & is dependent on the real wage rae
quantity of labour supplied incerases
as the
real wage rate increases
(∴ labour curve slopes upwards)
growth of labour causes potential GDP to grow (i.e when labour curve shifts right)
∴ at a
higher real wage rate
,
more people choose to work and more people choose to work longer hours if they can earn more per hour
Labour market equilibrium
The price of labour is the real wage rate
labour supply and labour demand follow the laws of supply and demand
∴ labour shortage = rise in real wage rate
∴ labour surplus = fall in real wage rate
∴ neither shortage or suplus = equilibrium (economy is at
full employment
)
What makes potential GDP grow?
Growth in
labour supply
when supply of labour increases (population growth causes this), labour supply curve shifts right
when
population increases
, potential GDP
increases
, real wage rate
decreases
quantity of labour changes as these factors change:
average hours per worker
,
employment to population ratio
,
working age population
increase in population will
decrease
potential GDP per hour of labour due to diminishing returns
see pg 507 for effects of population growth
Growth in
labour productivity
labour productivity is the quantity of RGDP produced by an hour of labour (i.e RGDP ÷ aggregate labour hours)
standard of living increases when labour productivity increases (∴ when
RGDP grows)
increase in labour productivity
shifts labour demand curve right and
increases
potential GDP and labour hours worked
increase in labour productivity causes upward shift and movement along aggregate production function and shifts labour demand curve right
see pg 508 for effect of increase in labour productivity
What makes labour productivity grow?
Physical Capital growth
•as the amount of capital per worker increases, labour productivity also increases
Human capital growth
•human capital is the fundamental source of labour productivity growth
•human capital grows when a new discovery is made or when people learn more about using past discoveries
Technological advances
•is the greatest contributor to labour productivity growth
Rule of 70
The number of years it takes for the level of any variable to double is approximately 70 ÷ the annual % growth rate of the variable
• e.g @ a 7% growth rate, it'll take 70 ÷ 7 = 10 years for the growth rate to double
Policies for achieving faster growth
•Stimulate saving, research and development
•Improve the quality of education
•Provide international aid to developing nations
•encourage international trade
see pg516