Chapter 26 Growth, Productivity, and the Wealth of Nations

Chapter 26 Growth, Productivity, and the Wealth of Nations...

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Chapter 26: Growth, Productivity, and the Wealth of Nations Potential output is the highest amount of output an economy can produce from existing production processes and resources. Potential output is a barrier beyond which can economy cannot expand without increasing available factors of production increasing productivity . Long run growth focuses on supply – Say’s law assumes supply creates its own demand. In the short run, economist considers potential output fixed. In the long run, an economy’s potential output is changeable. Growth in income improves lives by fulfilling basic needs and making more goods available to more people. Small differences in growth rates can mean huge difference sin income levels because of compounding . o Compounding means that growth is based not only on the original level of income but also on the accumulation of previous year increase in income. o Rules of 72 states that the number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of increase . Specialization is the concentration of individuals on certain aspects of production and division of labor is splitting up of a task to allow for specialization of production. Even though growth isn’t evenly distributed, in general, it helps the poor. o But they could be better off if income was distributed in their favor. Per capita growth the country is producing more goods and services per person. o In many cases the population of a country grows faster than its output, hence, we see a reduction in per capita growth Per capita growth = % change in output - % change in population Growth-Compatible Institutions o Institutions that foster growth must have incentive built into them that lead people to
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This note was uploaded on 02/23/2011 for the course ECON 2020 taught by Professor Coppock during the Spring '08 term at UVA.

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Chapter 26 Growth, Productivity, and the Wealth of Nations...

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