Unit 3 Flashcards
Rule of 70
No if years to double: growth rate
Convergence
Moving towards a union of iuniformity
Divergence
Getting further apart
When does economic growth occur
When real GDP increases
But a one-shot increase in real GDP or a recovery from
recession is not economic growth.
Economic growth is the sustained, year-on-year increase
in potential GDP.
Potential GDP
The quantity of real GDP produced at full employment
How is potential GDP determined
- The aggregate production function
The aggregate labour market
Aggregate production function
Everything else (capital
and technology) being
constant, an increase in
labour increases real GDP,
but at decreasing rate.
The law of diminishing return
a principle stating that profits or benefits gained from something will represent a proportionally smaller gain as more money or energy is invested in it.
What determines aggregate level of employment
- The demand for labour shows the quantity of labour demanded and the real wage rate.
- The supply of labour shows the quantity of labour
supplied and the real wage rate. - The real wage rate is the money wage rate divided by the price level.
- The labour market equilibrium:
- The quantity of labour demanded = The quantity of labour supplied.
What happens when you increase the wage rate
The demand for labour lowers
The higher the wage rate:
The higher the supply of labour
Potential GDP
The quantity of real GDP produced when the economy is at full employment
What makes potential GDP grow
- Growth in the supply of labour
- Growth in labour productivity
Growth in the supply of labour; changes in
- The working-age population
- Employment-to-population ratio
- Average hours per worker
Population growth increase aggregate hours and real GDP
