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Unformatted text preview: Chapter 4: Long-run Economic Growth Long-run Economic Growth the study of the general upward path of output over time. o It is important to note that even small differences in economic growth make a huge change to human welfare. o Rule of 70: (70/growth rate per year) = number of years it takes for GDP per capita to double Long-run Growth Model designed to explain differences in growth rates across countries and over time. o Describes the economy in a state where supply and demand for both goods and workers are in balance. The long-run growth model does not try to explain short run fluctuations or large events. 4.1 THE DETERMINANTS OF ECONOMIC GROWTH 1. Labor the people available for work 2. Capital equipment, structures, and other productive facilities 3. Technology the knowledge about how to use labor and capital to produce goods and services LABOR Production depends on the number of workers employed (number of unemployed workers from the number of workers in the labor force) as well as the number hours they work each year. Labor Force Participation Rate the percentage of working-age population in the labor force. This has been steadily increasing during the last 20 years, mostly because of the increasing participation of women. Labor Input The total number of hours worked in the economy in a given year. CAPITAL Any given year the amount of capital is determined by investment in previous years The capital stock increases from one year to the next as long as the gross investment is greater than the depreciation of the capital stock. Any investment project undertaken this year will not increase the capital stock until the project is complete (for instance, the factory is built) TECHNOLOGY Technology includes anything that influences the productivity of workers or capital o This includes things like how efficiently the business is run too HENRY FORDS ASSEMBLY LINE Mass production assembly lines greatly increased the productivity of workers and capital It is useful to define technological change as something that increases total factor productivity PRODUCTION FUNCTION Production Function shows how much output can be produced from given amounts of labor, capital, and technology. Y = f(L,K,A) o Assume two factors are constant and play with the third factor to see the effects on the function. The Marginal Product of Labor is the additional output produced by one additional unit of work. o Marginal diminishing returns account for the slope becoming less steep as you travel along it. 4.2 FULL EMPLOYMENT AND POTENTIAL GDP Potential GDP the amount of production that occurs when labor is fully employed The growth model assumes that the economy is at full employment. (quantity of labor demanded = supplied) THE DEMAND FOR LABOR Real wage the dollar wage (W) divided by the price level (P) A profit maximizing firm chooses the level of employment in which the marginal product of labor = the real wage...
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This note was uploaded on 11/02/2008 for the course ECON 304 taught by Professor Greenlaw during the Spring '07 term at Mary Washington.
- Spring '07