Unit 6- Economic Growth -Economic growth- sustained expansion of production possibilities o Different from the rise in incomes that occurs during the recovery from a recession o Sustained trend, not temporary -Economic growth rate- (real GDP in current year – real GDP in previous year)/GDP in previous year -Real GDP per capita- real GDP/population o Not a perfect measure o Growth rate of real GDP per capita = growth rate of real GDP – growth rate of population -Rule of 70- approximates how many years it will take for the economy to double at a given rate of economic growth o # of years for economy to double = 70/annual growth rate of economic growth o Ex: if annual per capita Y increases at 5% every year it will take approximately 14 years todouble -Sustained growth in Y per capita occurs only when the amount of output produced by the average worker increases steadily-Labor productivity = Y/# of people working-If workers are creating more output, on average, the pie of the economic pie will be rising and the average person’s slice will also be rising-What factors lead to higher productivity?1. Technology2. Human capital3. Physical capitalo Tech and physical capital aren’t the same capital is the tool itself, technology is the improvement of the tool -Aggregate production function- shows how productivity depends on quantities of physical capital per worker and human capital per worker as well as state of technology -Y per worker = estimated level of tech x (physical capital per work).4 x (human capital per worker)-6-Diminishing returns to physical capital- all else equal, as physical capital is increasing aggregate output increases by smaller amount Economic Growth on GraphsWhat can the government do to promote economic growth?-Physical capital o Give firms tax breaks they will have more money to invest in things o Infrastructure buildings, highways, bridges, and public facilities businesses are ableto transport more businesses are able to spend more money on investment -Human capital o Public schools- through 12th grade o Provide grants for research and development o Student loans for college/lower interest rates -Technology o Provide grants for research and developmentWhat can the government do to hinder economic growth?-Increase taxes on firms -Decrease subsidies, grants, and government spending on infrastructure -Crowd out private investors -Instability people will not invest in the country
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