LEC IV Economic Growth

LEC IV Economic Growth - MacroModuleLecIV EconomicGrowth...

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 11/8/10  Prof  Srivatsan 11 Macro Module – Lec IV Economic Growth
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 11/8/10  Prof  Srivatsan The Importance of Growth Achieving higher growth rate in  long-run Some sacrifice in short-run Average standard of living Total output (real GDP) per person 2
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 11/8/10  Prof  Srivatsan The Importance of Growth Output grows faster than the  population GDP per capita rises Output grows more slowly than the  population  Average standard of living will fall 33
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 11/8/10  Prof  Srivatsan What Makes Economies  Grow ? 1. Labor productivity Output produced by the average worker in an hour Productivity = Output per hour   Size of the population 44 worked hours Total output Total ty Productivi =
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 11/8/10  Prof  Srivatsan What Makes Economies  Grow ? 3. Number of hours the average worker spends at the job 4. Fraction of the population that is working (employment- population ratio) 55 employment Total hours Total hours Average = Population employment Total EPR =
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 11/8/10  Prof  Srivatsan What Makes Economies  Grow ? Total output = Productivity  ×  Average hours  ×  EPR  ×   Population Growth equation % Δ Total output = % Δ  Productivity  + % Δ  Average hours     +  % Δ  EPR  +  % Δ  Population 66
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 11/8/10  Prof  Srivatsan Economic Growth and Living  Standards Growth in output per person and living standards Employment–population ratio increases Productivity grows % Δ Total output per person = % Δ  Productivity + % Δ  Average hours  +  % Δ EPR 77
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 11/8/10  Prof  Srivatsan Growth in ERP For a given population growth rate The greater the growth of total employment The greater the rise in the EPR Or the smaller the drop in the EPR Employment increases if Labor supply increases Labor demand increases Or a combination of both 88
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 11/8/10  Prof  Srivatsan An Increase in Labor Supply 99 1 6 $ 2 0 L D 1 5 $ 1 0 $11 .5 1 8 1 5 0 A 1 8 0 B Real Hourl y Wage Million s of  Worker s A B Real Output ($  Trillion s) Million s of  S 2 L
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 11/8/10  Prof  Srivatsan An Increase in Labor  Demand 10 L S $ 2 2 2 0 1 5 0 A 1 8 0 B Real Hourly  Wage Millions of  Workers D 1 L
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 11/8/10  Prof  Srivatsan The U.S. Labor Market Over A Century 11 L 1 L 2 W 1 W 2 A B D 2 L D 1 L S 1 L S 2 L Real Hourly  Wage Millions of  Workers
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 11/8/10  Prof  Srivatsan How To Increase Employment and the  EPR Increase the labor supply Cut tax rates Cut benefits to the needy Results Speed the rightward shifts of labor supply Speed the growth in employment Raise EPR Raise output per person 12
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 11/8/10  Prof  Srivatsan How To Increase Employment and the  EPR Increase labor demand  Increase the skills of the workforce Subsidize employment Results more directly  Speed the rightward shift in the labor demand curve Raise EPR Raise output per person 13
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 11/8/10
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