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ECO3041 - Ch 15 Economic Growth

ECO3041 - Ch 15 Economic Growth - Chapter 15 Notes Economic...

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Chapter 15 Notes Economic Growth FIU Department of Economics Rafael Dacal
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Chapter 15 Notes I. The Nature of Growth Short-Run Changes in Capacity Use The easiest kind of growth comes form increased use of our productive capabilities. We have illustrated the short-run limits to output with a production function. You can increase the production only if you are a point inside the PPF. The way we achieve this in the SR is by increasing employment to full-employment productivity. (In the short run all you can do is hire or fire). Long-Run Changes in Capacity To increase output further we must expand the capacity. To do so we have to shift the production possibility frontier – this implies an increase in potential GDP. To achieve large and lasting increase in output we must push our PPF outward. o Increase labor – (increase the birth rate) o Increase productivity – (technological advance) Economic growth is an increase in output (i.e. and expansion of PPF). Aggregate Supply Focus AS we have observe, the AS curve set limits to the demand side policy. The slope of the AS curve determine how much inflation we have to pay to obtain more output. In LR the position of AS curve limits total output. To get more output in the long run, we have to shift the LR-AS. 2
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Chapter 15 Notes Nominal vs. Real GDP When thinking of economic growth we look only at real GDP Real GDP refers to the actual quantity of goods and services produced Real GDP avoids the distortions of inflation by valuing output in constant prices. II. Growth Index The Growth Rate Growth rate is the percentage change in real GDP from one period to another Growth Rate = GDP period base GDP real , think 100 × - Old Old New
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