ECON Exam 3 review Chapters 9 11 Chapter 9 9 1 How do we define economic growth Increase in per capita real gdp measured by its rate of change per year must be per capita so it is per person so there isn t the india vs Denmark problem Increase in economic growth rates will cause pp curve to shift OUTWARD Which of the following variables is used to measure economic growth REAL GPD per capita What country has the highest GDP China The term economic growth refers to increases in PRODUCTIVE CAPACITY High economic growth rate LARGE INCREASE IN PER CAPITA REAL GDP Benefits to economic growth reduce illiteracy and poverty improve health longer lives and political stability Costs environmental pollution breakdown of family isolation and alienation and urban congestion Remember slight changes in growth rate can greatly impact the long run Rule of 70 is how many years for per capital real GDP to double 70 divided by average economic growth Example if 10 growth it is 70 10 so 7 years 9 2 Productivity Increases the Heart of economic growth Economic growth growth of capital growth of labor growth in productivity of capital and of labor Labor productivity total real domestic output real GDP divided by number of workers output per worker or number of labor hours It increased whenever average output per worker increases 9 3 Saving A Fundamental Determinant of Economic Growth Giving up consumption today for consumption tomorrow accelerates economic growth by increasing saving out of disposable income The rate of saving affects economic growth The relationship between rate of saving and per capita real GDP is positive A higher saving rate increases investment spending All other things constant higher saving rates lead to higher standards of living Japan has the highest saving rate 9 4 New Growth Theory and the Determinants of Growth A theory of economic growth that examines the factors determining why tech research innovation and the like are undertaken and how they interact Tech a separate factor of production when the rewards are greater more advances will occur Research patents when an inventor gets one the protection would increase spending on R D For every 1 rise in the stock of research and development R D in the US productivity worldwide increases by about 0 25 Increases in human capital can lead to greater rates of economic growth Free trade faster spread of tech Innovation typically increases when market incentives and private property rights are encouraged Real wealth creation comes from innovation and invention is a facet of innovation According to Romer invest in knowledge we need to keep coming up with new ideas Importance of human capital it is the knowledge people aquire investing in it raises standards of living 9 5 Immigration Property Rights and Growth Kremer believes population growth drives tech progress immigrants raise the standard of living for the natives increase a nation s labor pool Simon says legal and illegal immigrants have a positive effect on welfare of Americans Well defined property rights stimulate economic growth more capital accumulation there will be also more entrepreneurship It also increases the probability that a person can gain from making investments today They also give entrprenuers more incentive to engage in risky business 1 3 of US patents are science trained immigrants if immigration flow was halted there would be less inventions increased population grown with real GPD unchanged reduced econ grown bc reduced per capita GDP 9 6 Economic Development The study of factors that contribute to the economic growth of a country 20 of the world lives on less than 1 50 per day The US poverty level exceeds the average income of the world As a nation s real GPD increases the rate of population growth declines Malthus said population would grow faster than food and he was proved wrong 3 stages of development agriculture manufacturing service sector 4 factors system of property rights having an educated population letting creative destruction run its course limiting protectionism 10 1 Output growth and the long run aggregate supply curve The aggregate supply curve relates planned aggregate production to price level The aggregate supply is all planned production for the entire economy The LRAS represents full employment and full adjustment and full information level of output It is a vertical line so price would not shift it Vertical because the economy has reached its potential real GDP and is at full employment The value of a current sum expressed in terms of prices in a base year base year Endowments the resources in an economy both physical resources and those such as ingenuity and management skills Growth is shown by outward shifts of either the ppc of the LRAS caused by growth of population and the labor force participation rate capital accumulation improvements in tech International trade barriers removed the LRAS will increase When there is a reduction in the labor force the LRAS will shift left 10 2 Total Expenditures and Aggregate Demand Aggregate demand or aggregate expenditures the total of all planned expenditures in the entire economy Aggregate Demand Curve curve showing planned purchases rates for all final good and services in the economy all other things constant Total amount of our output that individuals firms governments want to buy and what determines the economy equilibrium price level and the rate of inflation The aggregate demand curve has a negative relationship between price level and real GPD Along the curve a higher price is associated with a lower real GDP What happens when price level rises The aggregate demand is downward sloping because of 1 The real balance effect wealth effect the change in expenditures resulting from a change in the real value of money balances when the price changes 2 The interest rate effect higher price levels indirectly increase the interest rate which in turn causes a reduction in borrowing and spending One of the reasons the curve slopes downward 3 The open economy effect higher price levels result in foreigners buying less American things and American s buying more foreign things 10 3 Shifts in the Aggregate Demand Curve key word no price level any non price level chance that increases aggregate spending on domestic goods shifts the AD to the right increase in real interest rate tax cut any non price level change that decreases aggregate spending on domestic goods shift the AD to the left decrease in