Chapter 6B | GDP, Economic Growth, Business Cycles Flashcards
Potential GDP
real GDP when all inputs fully employed – labour, capital, land/resources, entrepreneurship
Short run goal for economic performance
Outcome if invisible hand works perfectly
Potential GDP per person
potential GDP divided by the population
Short-run maximum possible living standards for an economy
Economic Growth
expansion of economy’s capacity to produce products and services; increase in potential GDP (per person)
Macro production possibilities frontier (PPF)
shows maximum combinations of products and services a country can produce when all inputs fully employed
On macro PPF, all inputs fully employed; economy producing at potential GDP
Inside macro PPF, some inputs unemployed; economy producing below potential GDP
Economic growth increases potential GDP (per person)
Shifts macro PPF outward
Caused by increases in the quantity or quality of a country’s inputs, including technological change
Increases in labour
Quantity - population growth, immigration, labour force participation rate
Quality - increases in human capital – increased earning potential from work experience, on the job training, education
Increases in capital
Quantity - more factories and equipment
Quality - technological change – improvements in quality of capital through innovation, research, development
Increases in land and resources
Quantity - bringing land and resources not connected to markets into the circular flow
Quality - due to increases in capital used with land
Increases in entrepreneurship
Quantity and quality interrelated
Better management techniques, organization, worker/management relations
Economic growth rate
annual percentage change in real GDP per person
Real GDP Per Person growth rate (%) = Real GDP per person this year - Real GDP per person last year / Real GDP per person last year (x100)
Canada’s average annual economic growth rate, 1926-2017, was 2%
Canada’s economic growth rate was 2% in 2018
1.7% in 2019
Rule of 70
number of years it takes for initial amount to double is roughly 70 divided by annual percentage growth rate
Because of compounding, small differences in annual growth rates have large consequences over time
Productivity
quantity of real GDP produced by an hour of labour
Increases in productivity increase living standards
More can be produced
Reduced amount of work time required to buy products and services
Creative destruction
competitive business innovations generate profits for winners, improving living standards for all, but destroy less productive or less desirable products and production methods
Business cycles
fluctuations of real GDP around potential GDP – are periods of real GDP expansion and contraction. Output gaps measure the difference between real GDP and potential GDP, and “closing the gap” is an important target for policymakers.
