chapter+5+_11_+09-26-08 - 1 Macroeconomics as a Second...

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1 Macroeconomics as a Second Language Chapter 5 (11): Long-Run Economic Growth Martha L. Olney olney@berkeley.edu September 26, 2008 Why are some nations rich and others poor? Why do standards of living sometimes rise quickly and other times rise slowly . . . or not at all? Economists answer these questions with models of economic growth. Economies can produce more output – become richer – when there are more inputs or when the inputs’ productivity rises. Key terms and concepts $ Short Run $ Growth $ Growing the Economy $ Long Run $ Real GDP per Capita $ Standard of Living 5 - 1
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$ Growth Rate of the Economy $ Arithmetic Mean $ Geometric Mean $ Rule of 70 $ Aggregate Production Function $ Capital-Labor Ratio $ Constant Returns to Scale $ Scale of Production $ Economies of Scale $ Increasing Returns to Scale $ Diseconomies of Scale $ Decreasing Returns to Scale $ Growth Accounting $ Residual Growth $ Residual $ Total Factor Productivity or $ TFP $ Labor Productivity $ Capital Productivity $ Natural Population Growth 5 - 2
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$ Baby Boom $ Life Expectancy $ Immigration $ Capital Stock $ Investment $ Depreciation $ Depreciation Rate $ Human Capital $ Property Rights $ Intellectual Property Rights $ Contracts $ Productivity Growth Slowdown $ 5-year Centered Moving Average $ Productivity Growth Resurgence Key equations $ Real GDP per capita $ Rate of change $ Aggregate production function 5 - 3
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Key graphs $ Production possibilities frontier $ Aggregate production function What is Growth? Economists use the word “growth” in two different contexts: short-run and long-run contexts. For macroeconomists, the short run is a period of a few months to a few years. Macroeconomists who focus on the short run use the term growth to refer to changes in real GDP from quarter to quarter, or year to year. Some use the phrase “growing the economy ” to refer to policies or events that make real GDP increase over the short run. The long run is a period of a decade or a generation. Long-run growth refers to changes from decade to decade, or generation to generation. Changes in what? Unfortunately for students, there are two answers. Some economists and textbooks use one definition of long-run growth; others use the other. Long-run growth can be either $ increases in real GDP, or $ increases in real GDP per capita Real GDP per capita is the phrase economists use for real GDP per person. 5 - 4
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Real GDP per capita is also sometimes called the standard of living . Production Possibilities Frontier . Economists sometimes use the model of the production possibilities frontier (PPF) to capture the idea of economic growth. Remember from Chapter 2, the PPF shows the possible combinations of output that can be produced with the economy’s available inputs. A key simplifying assumption of the PPF model is that the economy can produce only two types of output. Of course, every economy produces much more than two types of output. But making the assumption of only two types of output allows us
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chapter+5+_11_+09-26-08 - 1 Macroeconomics as a Second...

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