Chapter 9 Notes - Chapter 9 Notes Economic Growth Financial...

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Chapter 9 Notes Economic Growth, Financial System, and Business Cycles A key measure of the success of any economy is its ability to increase production of goods and services faster than the growth in population. Increasing production faster than population growth is the only way that the standard of living of the average person in a country can increase. Financial markets and financial intermediaries together comprise the financial system. Business Cycle : alternating periods of economic expansion and economic recession. o Every period of expansion is followed by a period of recession, and visa versa. Long-Run Economic Growth is the Key to Rising Living Standards Long-Run Economic Growth : the process by which rising productivity increases the average standard of living. The best measure of standard of living is real GDP per person, usually referred to as real GDP per capita . o An increase in real GDP in 1900 to 2004 understates the true increase in the standard of living of Americans in 2004. Many of today’s goods/services were not available in 1900. The level of pollution, the level of crime, spiritual well-being and many other factors ignored in GDP contribute to a person’s happiness. Economists rely heavily on comparisons of real GDP per capita because it is the best means of comparing the performance of one economy over time or the performance of different economies at any particular time. The Connection between Economic Prosperity and Health One important measure of healthy is life expectancy at birth. o Countries that have experienced economic growth have seen dramatic increases in life expectancies. Technology and economic growth allow people in the near future to live longer lives, but a much smaller fraction of those lives will need to be spent at paid work. Calculating Growth Rates and the Rule of 70 The growth rate of real GDP during a particular year is equal to the percentage change from the previous year. o (year 2 – year 1)/year 1 For longer periods of time, we can use the average annual growth rate . o For 2002-2004: (2002)+(2003)+(2004) / 3 Rule of 70: o Number of years to double = (70) / growth rate What Determines the Rate of Long-Run Growth? Increases in real GDP per capita depend on increases in labor productivity. Labor Productivity : the quantity of goods/services that can be produced by one worker or by one hour of work. o Measured by output per hour of work.
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o Two factors determine labor productivity: The quantity of capital per hour worked and the level of technology. Economic growth occurs if the quantity of capital per hour worked increases and if technological change occurs. Increases in Capital per Hour Worked Capital : manufactured goods that are used to produce other goods and services.
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