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ch10 - CHAPTER CHECKLIST When you have completed your study...

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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Define and calculate the economic growth rate, and explain the implications of sustained growth. 1 Identify the main sources of economic growth. Review some theories of economic growth that try to explain why growth rates vary over time and across countries. 2 3 Describe some policies that might speed economic growth. 4
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10.1 THE BASICS OF ECONOMIC GROWTH Economic growth is a sustained expansion of production possibilities measured as the increase in real GDP produced over a given period. Calculating Growth Rates Economic growth rate The rate of change of real GDP expressed as a percentage per year.
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10.1 THE BASICS OF ECONOMIC GROWTH To calculate this growth rate, we use the formula: Growth of real GDP = Real GDP in current year Real GDP in previous year x 100 Real GDP in previous year For example, if real GDP in the current year is $8.4 trillion and if real GDP in the previous year was $8.0 trillion, then the growth rate of real GDP is : Growth of real GDP = $8.4 trillion – $8.0 trillion $8.0 trillion x 100 = 5 percent.
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10.1 THE BASICS OF ECONOMIC GROWTH The standard of living ultimately depends on real GDP per person . Real GDP per person Real GDP divided by the population. Any individual ’s standard of living depends on the distribution of GDP as well as average real GDP per person, but the average standard of living can be measured by real GDP per person, i.e. real GDP divided by the population.
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10.1 THE BASICS OF ECONOMIC GROWTH For example, to calculate this growth rate, of GDP per person, we use the same formula as before, replacing real GDP with real GDP per person. Suppose, for example, that in the current year, when real GDP is $8.4 trillion, the population is 202 million. Then real GDP per person is $8.4 trillion divided by 202 million, which equals $41,584. And suppose that in the previous year, when real GDP was $8.0 trillion, the population was
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10.1 THE BASICS OF ECONOMIC GROWTH Use these two values of real GDP per person in the growth formula to calculate the growth rate of real GDP per person. It is: Growth rate of real GDP per person $41,584 – $40,000 $40,000 x 100 = 4 percent. =
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10.1 THE BASICS OF ECONOMIC GROWTH The growth rate of real GDP per person can also be calculated by using the approximation, very accurate for growth rates less than about 10% per year, Growth of real GDP per person Growth rate of real GDP Growth rate of population = Growth of population 202 million – 200 million 200 million x 100 = 1 percent. =
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10.1 THE BASICS OF ECONOMIC GROWTH This formula makes it clear that real GDP per person grows only if real GDP grows faster than the population grows. If the growth rate of the population exceeds the growth of real   GDP, real GDP per person falls.
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