5.6-5.7 Economic Growth and Public Policy

Measures of Economic Growth and Standard of Living

1. Real GDP per capita

2. Growth Rate - sustained increase in real GDP per capita over time

3. increase in LRAS (Potential GDP per capita over time)

all boils down to productivity

Productivity

output per unit of input/labor

e.g. specialization, capital per worker, human capital, technology

How to increase capital stock

investment spending, which is influenced by interest rates

Aggregate Production Function

shows direct relationship b/w # of inputs and # of outputs

Productivity levels off due to diminishing returns

Improvement in technology effect on aggregate production function

same input with MORE output

Gov Policies resulting in long-run economic growth

1. Education/training spending- increases human capital

2. Infrastructure spending- public works increase physical capital

3. Production/Investment Incentive Programs- increase physical capital

Investment Incentive Programs

• supply-side policy

• gov increases production by reducing business taxes/regulations

Controversial b/c

1. providing tax breaks can disproportionately benefit the wealthy

2. assumes corporations will spend tax cuts on investment rather than payout shareholders