Chapter 7 - Chapter 7 Economic Growth: -Increase in Real...

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Chapter 7 Economic Growth: -Increase in Real GDP over some period -Increase in Real GDP per capita over some period -Remember, GDP doesn’t measure everything. There were improvements in products, increased leisure, etc. -Economic growth lessens the burden of scarcity. We can consume more today and still increase capacity for the future. “Rule of 70”- tells the number of years it will take for some measure to double, given its annual percentage increase. Approx # of Year to Double = 70/ Annual Percentage Rate of Growth Sources of Economic Growth: 1. Increase resources 2. Increase productivity of existing resources Productivity = Real Output/ Unit of Input Increase productivity of resources by: 1. Improving health, education, training, motivation of workers 2. Improving capital quality and quantity 3. Improving organization and management 4. Reallocate labor from less efficient to more efficient industries -About 1/3 of U.S. growth comes from more resources; 2/3 comes from improved productivity. Business Cycle- alternating increases and decreases in the level of economic activity, extending over several years, varying in length and intensity. Business Cycle Phases: -Peak: temporary maximum of economic output. Economy is at full employment, nearing capacity; inflationary pressure exists -Recession: at least two consecutive quarters of negative Real GDP growth, income, unemployment. Economy may not experience price reductions because prices are “inflexible downward” unless recession is severe and prolonged. -Trough: bottom of reduction in output. It may be a short or long period of time. -Recovery: expansion of economic output Causes of Business Cycle Fluctuations: -“momentous innovation” -change in productivity -changes in monetary policy -There is general agreement that changes in total spending propel business cycles.
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During Economic downturns: 1. Capital goods and consumer durable are the most affected. Business and consumers put off “big purchases”. These industries benefit during expansion.
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Chapter 7 - Chapter 7 Economic Growth: -Increase in Real...

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