Transcript AP MACRO MR. LIPMAN - Mr. Fogel Peabody Veterans Memorial

April 27, 2015
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Begin Unit 5 : Economic Growth and Productivity
HW: Activity 6-1 and 6-2
Exam: This Thursday 
Vocabulary Due Thursday (Ch. 25)
Current Event Due Friday
Long Run
Economic Growth
• Q: What is the difference
between SR and LR economic
growth?
• Long run economic growth
occurs when a country can
produce more of a good without
having to give up another good
or when a country can produce
more overall.
• On the AS/AD graph, long run
economic growth is
demonstrated by a rightward
shift of the LRAS curve.
• And on the PPC?...
Long Run Economic
Growth
• 3 Important Sources of Long
Run Economic Growth:
1. Quantity and Quality of labor
(improvements in education,
training, health of workers,
etc.)
2. Quantity and Quality of
capital (Investment,
research, development, etc.)
3. Level of technology
• Increases in any of these
will increase real GDP.
Economic Growth
• Investing in the following factors contribute to a
nation’s productivity, and thus its’ economic
growth:
1. Human capital: education and skills a worker
possesses.
2. Physical capital: any manufactured unit that is
used in production
3. Technological Advancement
4. Nature’s Gifts
5. In addition to above list, Government/Fed Policies
Long Run Economic Growth
Economic Growth is measured by changes in Real GDP or
by changes in Real GDP per capita.
Real GDP per capita is real GDP divided by the total population
Real GDP per capita measures Standard of Living
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There are some problems with using GDP to measure
a nation’s true standard of living
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The top 10 most populated countries
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GDP Per Capita
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Investment Spending
• Investment Spending leads to an increase
in physical capital
• Investment Spending comes from
domestic savings or inflows of foreign
capital
• Business R&D is a key to increasing
physical capital
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Role of Government in Promoting Long Run
Economic Growth
Key to LR economic growth is
productivity of a nation.
What does each worker
produce (per capita)?
INVESTMENT IN PHYSICAL
CAPITAL!
INVESTMENT
INFRASTRUCTURE
INVESTMENT IN HUMAN
CAPITAL (EDUCATION OF
WORKFORCE)
USE, PROTECT, SUSTAIN
NATURAL RESOURCES
FACILITATE TECHNOLIGICAL
PROGRESS
PROVIDE POLITCAL
STABILITY
ENSURE PROPERTY RIGHTS
LIMITED INTERVENTION
WHEN NECESSARY
THE REAL PRICE OF OIL IS BASED ON DEMAND AND NOT IMPORTATION
ISSUE: (SEE THE NEXT SLIDE)
AS THE ECONOMY GROWS CONSUMPTION (DEMAND) GROWS WITH
IT AND THIS, NOT IMPORTATION ISSUES, ARE THE CAUSE OF
HIGHER PRICES AT THE GAS PUMP TODAY
• LONG-RUN ECONOMIC GROWTH IS
BASED UPON THE SUSTAINED RISE IN
THE PRODUCTION OF GOODS AND
SERVICES
• SHORT-RUN “UPS” AND “DOWNS” ARE
THE RESULT OF THE BUSINESS
CYCLE
Long-run Economic Growth and the
Production Possibilities Curve
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K
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Remember this? Economic Growth and Potential Growth for the Production
Possibility Curve
• In the AD/AS model, a short-run fluctuation of the
business cycle would be seen as a shift of the AD curve
or SRAS curve. For example, a recessionary gap may
result in a decrease in input prices and an increase in
SRAS, but that does not mean the same thing as
economic growth. Likewise, an inflationary gap results
not in growth, but in a return of the economy to it’s long
run equilibrium.
You must distinguish between long-run growth
and short-run business cycle (SRAS)
The Long-run Aggregate Supply Curve
Long-run Growth and the LRAS Curve