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# ec-2 - Chapter 9 Economic Growth the Financial System and...

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Chapter 9: Economic Growth, the Financial System, and Business Cycles Learning Objectives Discuss the importance of long-run economic growth. Discuss the role of the financial system in facilitating long-run economic growth. Explain what happens during a business cycle. Long-run Economic Growth Measuring Growth with GDP Problem: Does not adjust for size of a country or give a constant purchasing power. Real GDP per capita =RGDP/Population Average Standard of Living = per capita Real GDP Note that per capita real GDP is only one measure of well-being (and only a rough one) Long-run economic growth is the process by which rising productivity increases the average standard of living. How can we compare today’s living standard with that of 100 years ago? Is per capita RGDP all that matters? Recall, Growth rate measure a percentage change between 2 time periods. If a number grows at a constant rate, g, then the number n periods away will equal (1+g) n Suppose an economy has a Real GDP of \$9.9 trillion grows at a constant rate of 3% for 5 years, what is the Real GDP after the fifth year? 9.9(1+0.3) 5 = 11.48 trillion Rule of 70 Periods to double = 70 ÷ percentage of growth rate How many years will an economy with a GDP of \$9.9 trillion take to double if it has a growth rate of 3%? 70/3 = 23.3 What influences the rate of long-run growth as we defined growth? 1

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Labor productivity is the quantity of goods and services that can be produced by one worker or by one hour of work. Two key factors determine labor productivity: The quantity of capital per hour worked The level of technology We can increase labor productivity by improving and/or increasing capital, improving human capital, and improving technology. For growth you will recall that we need enforceable property rights and access to markets which allow for voluntary exchange . The financial system is part of the economic infrastructure that helps voluntary exchange. Firms can finance their expansion from retained earnings, through financial markets, and through
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ec-2 - Chapter 9 Economic Growth the Financial System and...

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