Module 4: Long-Run Economic Growth

Economic Growth (Definition)

The percentage change in Real GDP per capita

Economic Growth (Equation)

(Year 2 GDP - Year 1 GDP)/Year 1 GDP * 100

What does long-run economic growth mean?

The process by which rising productivity increases the average standard of living

What is the Rule of 70?

It is a shortcut to determine how long it will take for an economic variable to double

Rule of 70 (Equation)

70/Growth Rate

What is the equation to find New Real GDP after n amount of years?

Old Real GDP * (1 + Growth Rate)^Number of years later

What are the keys to economic growth?

• Productivity

• Other resources

• Labor

• Education

What does the P stand for in POLE?

Productivity

What does the O stand for in POLE?

Other Resources

What does the L stand for in POLE?

Labor

What does the E stand for in POLE?

Education

What does Labor mean in POLE?

The available labor in Year t changes

• Available labor in Year t + Labor inflows - Labor outflows

What does education mean in POLE

• productive knowledge and skills that workers acquire through education, training, and experience

Increases of human capital (E in POLE) causes…

• Increases in productivity of the labor force

• more economic growth

What does Other Available Resources mean in POLE?

Physical capital, land, natural resources

• Physical Capital is buildings, machines…

(T/F): Depreciation is capital that is not longer available

True

Available Physical Captial in Year t changes + Investment - Depreciation

What does productivity include in POLE?

• Productivity

• Labor Productivity

• Competition Enhances

• Technology

What is total factor productivity

Productivity that makes all resources more productive

• technology, laws, executive orders…

What is labor productivity

total real domestic output (real GDP) divided by the number of workers (output per worker)

What is Competition Enhancers

• Protectionism: shelters from comp

  • tariffs, trade restrictions…

• Least Productive Firms Fail

How does technology enhance productivity

It enhances resources and benefits all factors of production

What is the production function?

it is an economic growth model that explains Real GDP in the Long Run

• Quantity of Capital

• Level of productivity

Per-Worker Production Function

Y = A*F(K,L,H.N)

• Y - Real GDP

• A - Productivity and Technology

• K- - Capital

• L - Labor

• H - Human Capital (naturalize to one)

• N - Natural Resources (naturalize to one)

Per-Worker Production Function (Calculation Equation)

Y = A*(K^a)(L*H)^b(N^Y)

What are characteristics that the Pre-Worker production Function?

• Technology constant

• Increases K/L move along production function (Increases in Q/L)

  • Diminishing returns (flattening of function)

What does the Per-Worker Production Function Change with Technological Change?

• Helps avoid diminishing returns to capital

• Shifts per worker function up

• Produce more real GDP per capita with the same capital per hour worked

What allows for continual increases in real GDP per capita in the Per-Worker Production Function?

Changes in productivity

What is Potential GDP from a production function

• all firms are operative at capacity (not at a maximum)

  • normal hours with normal workforce

what happens with Potential GPD rises?

• Labor Force expands

• more capital stock

• increase in productivity

What are the economic stages of development

1. agricultural stage

2. manufacturing stage

3. services stage

What are property rights?

the right to benefit from ones effort

• provides incentives to work hard

• encourage investment in physical and human capital

• encourages technological innovation

What would happened if there were no property rights?

• Effort is divorced from payment, reducing incentives

  • free riders become a problem

What is a free rider?

Someone who consumes a resources without working or contributing to the resource’s upkeep

What is the importance of having an honest government in economic development

• Property rights are meaningless unless a government guarantees property rights

• Corruption bleeds resources away from productive entrepreneurs

• Corruption takes resources away from more productive government activity

What is the importance of having political stability in economic development

• changing governments without the rule of law creates uncertainty which leads to less investment in physical and human capital

What is the importance of having a dependable legal system in economic development

• it facilities contracts and protects property from others

• poorly protected property rights can result from too much government or too little government