Transcript Mr. Mayer AP Macroeconomics

AP Macroeconomics
Economic Growth &
Productivity
Economic Growth Defined
• Sustained increase in Real GDP over
time.
• Sustained increase in Real GDP per
Capita over time.
Why Grow?
• Growth leads to greater prosperity for
society.
• Lessens the burden of scarcity.
• Increases the general level of wellbeing.
Conditions for Growth
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Rule of Law
Sound Legal and Economic Institutions
Economic Freedom
Respect for Private Property
Political & Economic Stability
– Low Inflationary Expectations
• Willingness to sacrifice current consumption
in order to grow
• Saving
• Trade
Physical Capital
• Tools, machinery, factories,
infrastructure
• Physical Capital is the product of
Investment.
• Investment is sensitive to interest rates
and expected rates of return.
• It takes capital to make capital.
• Capital must be maintained.
Technology & Productivity
• Research and development,
innovation and invention yield
increases in available technology.
• More technology in the hands of
workers increases productivity.
• Productivity is output per worker.
• More Productivity = Economic Growth.
Human Capital
• People are a country’s most important
resource. Therefore human capital must be
developed.
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology
Growth Illustrated
PL
LRAS
SRAS
P
AD
YF
GDPR
Growth Illustrated
PL
LRAS
SRAS
P
AD
YF
GDPR
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Capital Goods
Growth Illustrated
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PPC
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Consumer Goods
PPC1
Hindrances to Growth
• Economic and Political Instability
– High inflationary expectations
• Absence of the rule of law
• Diminished Private Property Rights
• Negative Incentives
– The welfare state
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Lack of Savings
Excess current consumption
Failure to maintain existing capital
Crowding Out of Investment
– Government deficits & debt increasing long term interest rates!
• Increased income inequality  Populist policies
• Restrictions on Free International Trade
FRQ – 2005 FORM B
• 2. Labor productivity is output per unit of labor. An increase
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in labor productivity is a source of economic growth.
(a) Identify two sources of increase in labor productivity.
(b) Assume that a country’s economy is at full empl
oyment. Productivity has been rising. Using a correctly
labeled graph of aggregate demand and aggregate supply,
show the long-run effect of the growth
in productivity on each of the following.
(i) Real output
(ii) Price level
(c) Assume that the economy produces only two goods, good
X and good Y. Using a correctly labeled
production possibility diagram, show the effect of the increase
in labor productivity