macroecon ch 10 11.docx - Macroeconomics notes ch 10 11 12...

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Macroeconomics notes ch 10, 11, 12, 13 Chapter 10 – Economic growth, the financial system and business cycles A successful economy is capable of increasing production of goods and services faster than the growth in population Why do some countries grow faster than others? Business cycle: alternating periods of economic expansion and economic recession; not uniform; periods of expansion and recession not same length; every US expansion has been followed by recession and every US recession has been followed by expansion 10.1 Long-run economic growth People in high-income countries expect that, over time, standard of living will improve In 1900, US was enjoying highest standard of living in the world; however, in that year only 3% of homes had electricity, 15% had indoor plumbing and 25% had running water; disease was very common due to lack of running water and used of shared toilets; in 1900 5000 out of 45000 children in Chicago died before their 1 st birthday Life expectancy in 1900 – til about 47; in 2015 – til about 80 The process of long-run economic growth brought the US to where it is today Long-run economic growth: the process by which rising productivity increases the average standard of living Measure long-run economic growth by increases in real GDP rather nominal; to adjust for changes in price level over time In 1900 real GDP per capita was $6000; in 2015 $50,010 The Connection between economic prosperity and health We can see direct effect of economic growth on living standards by looking at improvements in health in high income countries over the past 100 years Research by Robert fogel highlights connection between economic growth, improvements in tech, and improvements in human physiology The development of the germ theory of disease and technological progress in the purification of water in the late 19 th century led to sharp declines in sickness due to waterborne diseases People became taller, stronger and less susceptible to disease so they are more productive People have become more intelligent over time Researchers believe current state of human physiology will continue to improve as technology advances Calculating growth rates the rule of 70 Growth rate of real GDP or real GDP per capita during a particular year is equal to the percentage change from the previous year Formula: ([current year – previous year]/previous year) * 100 Longer periods of time – average annual growth rate ; taking annual growth rate that would result in 19XX increasing to whatever we are at in 20XX over amount of years in between
Shorter periods of time – averaging the growth rate for each year – adding up percentage rates/dividing by however many there are When discussing long-term economic growth, we shorten “average annual growth rate” to growth rate Can judge how rapidly an economic variable is growing by calculating the number of years it would take to double One easy way to calculate – using the rule of 70 Formula: number of years to double = 70/growth rate

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