Chapter 5: Long Run Economic Growth

Long Run Economic Growth

• Definition:

  • Long run economic growth refers to the increase over time in an economy's capacity to produce goods and services.

• Indicators of Growth:

  • GDP Growth vs. Population Growth:
  • The standard of living for each person improves when Gross Domestic Product (GDP) increases faster than the population. This indicates that the average output per person is rising.

• Requirements for Economic Growth:

  • For an economy to grow, it is essential that firms can produce more goods and services.
  • This necessitates investment in:
    • More equipment
    • More workers

• Funding for Growth:

  • Firms can acquire the necessary funds for investment from:
  • Households
    • This includes investment through personal savings or direct stock investments.
  • Financial Intermediaries
    • Entities such as banks that facilitate the flow of funds from savers to borrowers.

• Loanable Funds:

  • Loanable funds are defined as the funds available for borrowing in the financial markets for investment.
  • This includes funds that originate from households and can include savings or investments in stocks and bonds.