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Unformatted text preview: PART II OF THE COURSE: AGGREGATE SUPPLY AND LONG RUN GROWTH What causes real GDP per capita to rise by 2% per year in the long run? Why does real GDP growth not converge to zero? Why do some countries grow faster than others? Why do some countries not grow at all? These are the most important questions in macro and perhaps the most important questions period. Small differences in the long run growth rate is the difference between being rich and poor in a matter of a generation. Consider Canada, which grew at 2.15% per year over 1870-1990 and Argentina, which grew at 1.09% per year from 1900-1987. • Argentina and Canada were similar countries with similar GDP’s in the late 1800’s. • Canada grew 1.06% faster and is now developed. The average Canadian is more than 12 times as wealthy as his great grandfather. • The average Argentinian is only 2.5 times as wealthy as his great grandfather. • The average Canadian enjoys many things Argentinians do not: high quality health care, more leisure time, a cleaner environment, and all the latest gadgets. Consider now China, which grew at 1.71% from 1900-87 and Bangladesh, which grew at 0.08% during the same period. • Both were essentially farming economies in 1900. • Both were vulnerable to floods and natural disasters. • The average Chinese person makes more than 4 times his great grandfather. • The average Bangladesh person is in about the same position as his great grandfather and the country is still vulnerable to natural disasters. I Determinants of Long Run Growth (chapter 8) Definition 49 Aggregate Demand is the relationship between total demand for real goods and services (real GDP) by consumers, firms, government, and foreigners and a price index. Definition 50 Aggregate Supply is the relationship between the total value of all real goods and services (real GDP) produced in the economy and a price index. 43 Aggregate Supply: • Looks at real GDP from the production (value added) side. • Inputs capital, labor, and technology grow steadily. • Growth in inputs is therefore a good place to look for causes of long run growth. Aggregate Demand: • Looks at real GDP from the spending (spending approach) side. • Volatility in investment spending creates volatility in total spending which is aggregate demand. • Aggregate demand is a good place to look for causes of business cycles. Aggregate supply is determined from a production function. Let y be production or real GDP, N be hours worked (note total populatin L is used in the book), K be capital, and T be technology. Then: y = f ( N, K, T ) (55) So a long run increase in real GDP must come from increases in N , K , or T or some combination. Let’s check them out one by one....
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This note was uploaded on 01/08/2012 for the course ECO 212 taught by Professor Lorca,m during the Summer '08 term at University of Miami.
- Summer '08