Chapter 10 Section 1 Economic Growth the Financial System and Business Cycle A successful economy is capable of increasing production of goods and services faster than the growth in population o This level of growth is the only way that the standard of living of the average person in a country can increase Determinant of economic growth o Ability of firms to expand their operations buy additional equipment train workers and adopt new technologies Financial system financial markets financial intermediaries Business cycle alternating periods of economic expansion and economic recession of recession o Every period of expansion in US history ahs been followed by a period o Every period of recession has been followed by a period of expansion Long run economic growth the process by which rising productivity increases the average standard of living Measure is Real GDP per person which is referred to as Real GDP per capita Measure long run economic growth by increases in real GDP per capita over long periods of time cycle Real GDP per capita fluctuates because of the short run effects of the business o Over the long run the trend is strongly upward Best means of comparing the performance of one economy over time or the performance of different economies at any particular time Calculating Growth Rates Real GDP per capita percentage change from the previous year For longer period of time we can use the average annual growth rate o RGDPpc current RGDPpc old x 1 g N Number of years to double 70 growth rate o Small differences in growth rates can have large effects on how rapidly the standard of living in a country increase What determines the rate of long run growth Increase in Real GDP per capita depend on increase in labor productivity Labor productivity the quantity of goods and services that can be produced by one worker or by one hour of work o If the quantity of goods and services consumed by the average person is to increase the quantity of goods and services produced per hour of work must also increase 2 key factors that determine labor productivity o Quantity of capital per hour worked Increase in capital per hour worked Capital manufactured goods that are used to produce other goods and services Total amount of physical capital available in a country is known as the country s capital stock As the capital stock per hour worked increase worker productivity increase Human capital refers to the accumulated knowledge and skills workers acquire from education and training or from life experiences o Level of technology Technological change Economic growth depends more on technological change than on increase in capital per hour worked Technology refers to the processes a firm uses to turn inputs into outputs of goods and services Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs Potential GDP the level of real GDP attained when all firms are producing at capacity Increase over time as the labor force grows new factories and office building are built new machinery and equipment are installed and technological change takes place Each year the capacity of the economy to produce final goods and service expands by The actual level of real GDP may increase by more or less than as the economy moves through the business cycle