PHIL 1202 1st Edition Lecture 13 Outline of Last Lecture I. National Debt II. Nominal Interest Rate vs. Real Interest RateIII. Does Inflation Impose Costs on the Economy?Outline of Current Lecture I. Long-Run Economic Growth (10.1)II. Saving, Investment, and the Financial System (10.2)Current LectureI. Long-Run Economic Growth (10.1)a. Long-run economic growth, process by which rising productivity increases the average standard of living. i. Most commonly used measure of this average standard of living is real GDP per capita: the amount of production in the economy per person, adjusted for changes in the price level. b. Economic prosperity and health go hand-in-hand: richer nations can devote more resources to improving the health of their citizens, and healthier citizens are more productive. c. Another good measure of economic prosperity is the amount of time we can spend on leisurea. As lifespan grows, we can spend more time on leisure, and as we grow more productive, we can devote less time to more and more time on leisure.’d. Calculating Growth Ratesa. The growth rate of an economic variable like real GDP or real GDP per capita is equal to the percentage change from one year to the nexti. Over periods of years, we can average the growth rates to find the approximate annual rate of growthb. For longer time periods, we wouldn’t want to calculate each of the annual growth rates and then take an average in order to find the average annual growthrate; instead we would solve for the growth rate g, where:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Rule of 70: helps us determine how long it will take for an economic variable to double:1. Number of years to double= 70Growth ratec. What determines the rate of long run growth?i. Increases in real GDP per capita rely on increases in labor productivity: the quantity of goods and services that can be produced by one worker by one hour of work. ii. Why can the average American consume 8x as many goods and services now as in 1900?1. Because the average American produces 8x as many goods and services in an hour now, as in 1900. e. Factors affecting labor productivity growtha. Increases in capital per hour workedi. Capital is manufactured goods that are used to produce other goods and services1. The more capital a worker has available to use (including human capital, the accumulated knowledge and skills workers possess), the more productive he or she will be. ii. Technological Change1. Improvements in capital or methods to combine inputs into outputs (i.e. new technologies) allow workers to produce more in a given period of timea. The role of entrepreneurs here is critical, in pioneering new ways to bring together the factors of production to produce better or lower-cost products. f. Potential GDP a. Refers to the level of real GDP attained when all firms are operating at a capacity.Capacity here refers to “normal” hours and a “normal” sized workforce. i. Potential GDP rises when the labor force expands, when a nation acquiresmore capital stock, or when new technology are created. 1. Recession is shown graphically when actual real GDP is lower than potential real GDP (with a negative slope; when it flattens out or increases, it’s just recovery of recession)II. Saving, Investment, and the Financial System (10.2)a. Financial Systemi. Firms can finance some of their own expansion through retained earnings, reinvesting profits back into the firms1. But often firms want to obtain more funds for expansion that are available this way.ii. They obtain these funds via the financial system: the system of financial markets and financial intermediaries through which firms acquire funds from households. 1. Financial market examples: stock and bond markets2. Intermediaries: banksb. Financial Markets are markets where financial securities, such as stocks and bonds, are bought and sold.i. A financial security is a document stating the terms under which finds pass from buyer to seller. c. Financial Intermediaries are firms such as banks, mutual funds, & pension funds d. Three key services of the financial systemi. Risk-sharingii. Liquidityiii.