Chapter 8

# Chapter 8 - Chapter 8 Achieving a higher rate of growth in...

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Chapter 8 Achieving a higher rate of growth in the long run generally requires some sacrifice in the short run When output grows faster than the population, GDP per capita, our measure of the average standard of living, will rise. When output grows more slowly than the population, the average standard of living will fall Real GDP depends on 1. Labor productivity - The output produced by the average worker in an hour - ( ) total output real GDP total hours worked 2. The number of hours the average worker spends at the job - total hourstotal employment 3. Employment-population ratio (EPR) - The percentage of the population that is working - EPR = total employmentpopulation 4. The size of the population - Total output = ( ) total output real GDP total hours worked x total hourstotal employment x total employmentpopulation x population - Total output = productivity x average hours x EPR x population - Growth equation - An equation showing the percentage growth rate of output - %∆Total output = %∆productivity + %∆average hours + %∆EPR + %∆population

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- Living standards - Depends on real GDP per capita - total outputpopulation = productivity x average hours x EPR - %∆Total output per person = %∆productivity + %∆average hours + %∆EPR - To explain growth in output per person and living standards in the United states and other developed nations, economist look at two factors: increases in EPR and growth in productivity - - Growth in EPR - For a given growth rate of the population, the greater the growth of total employment, the greater will be rise (or the smaller will be drop) in EPR - Growth in employment can arise from an increase in labor supply (a rightward shift in the labor supply curve) or an increase in labor demand (a rightward shift of the labor demand curve) - Over the past century, increases in labor demand outpaced increases in labor supply, so that on balance, the average wage rate rose and employment increased - A cut in tax rates increases the reward for working, while a cut in benefits to the needy increases the hardship of not working. Either policy can speed the rightward shifts in the labor supply curve and the growth in employment, raising the EPR and output per person - Government policies that help increase the skills of the workforce or that subsidize employment more directly speed the rightward shift in the labor demand curve, increasing the EPR and output per person
- All sorts of employment policies lead to a one-time rise in the EPR, rather than a continually rising EPR that would contribute to sustained economic growth - Growth in productivity - Over the past several decades, and into the near future, virtually all growth in the average standard of living can be attributed to growth in productivity - Growth in the capital stock Capital per worker: the total capital stock divided by total employment When the flow of investment spending is greater than the flow of

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## This note was uploaded on 03/01/2009 for the course ECON 2006 taught by Professor Rdcothren during the Spring '08 term at Virginia Tech.

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Chapter 8 - Chapter 8 Achieving a higher rate of growth in...

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