Economics Chapter 21 Study Guide

Economics Chapter 21 Study Guide - Economics Chapter 21...

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Economics Chapter 21 Study Guide 1) Introduction a) A key measure of the success of any economy is its ability to increase production of goods and services faster than the growth in population. i) Causes living condition of average person to raise b) One determinant of economic growth is the ability of firms to expand their operations, buy additional equipment, rain workers and adopt new technologies. c) Business cycle is alternating periods of economic expansion and economic recession. i) They are not uniform: they are all different lengths etc. 2) Long-Run Economic Growth is the Key to Rising Living Standards a) Long-run economic growth is the process by which rising productivity increases the average standard of living. b) The best measure of the standard of living is real GDP per person, which is referred to as the real GDP per capita. i) Use this instead of nominal GDP to account for price changes. c) Making the Connection (The Connection between Economic Prosperity and Health) i) Because of technological advance, these children in India will live longer, be healthier and work less than their parents and grandparents. d) Calculating Growth Rates and the Rule of 70 i) The growth rate of real GDP or real GDP per capita during a particular year is equal to the percentage change from the previous year. (1) Ex: Measured in prices of the year 2000, real GDP equaled $10,321 billion in 2003 and rose to $10,756 billion in 2004. We calculate the growth of real GDP in 2004 as: (a) (10756-10321)/10321 x 100 ii) For longer periods of time, we can use the average annual growth rate. (1) Ex: Real GDP in the US was $1777 billion in 1950 and $10756 billion in 2004. To find the average annual growth rate, compute the growth rate that would result in 1777 growing to 10756 over a 54 years. Answer is 3.4% iii) For shorter periods of time we average the growth rate for each year. (1) Take the growth rates from each year and add them together and divide by the number of growth rates you added together. (2) Ex: (1.6+2.7+4.2)/3=2.8% iv) When discussing long run economic growth, we will usually shorten “average annual growth rate” to growth rate v) We can judge how rapidly an economic variable is growing by calculating the number of years it would take to double. vi) To calculate how may years it will take real GDP per capita to double use the rule of 70. That is: (1) Number of years to double=70/growth rate. (2) Ex: If Real GDP per capita is growing at a rate of 5% per year, it will
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double in 70/5=14 years. vii)The rule of 70 applies to more than GDP. Applies also to investments. e) What Determines the Rate of Long-Run Growth i) Increase in real GDP per capita depends on increases in labor productivity. ii)
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Economics Chapter 21 Study Guide - Economics Chapter 21...

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