Wk 4 - Economic Growth

Question 1

Economic growth

Answer 1

It is the sustained expansion of production possibilities measured as the increase in real GDP over a given period.

Question 2

Economic growth rate

Answer 2

• It is the annual percentage change of real GDP.
• Tells us how rapidly the total economy is expanding.

Question 3

Real GDP per person

Answer 3

• Real GDP divided by the population.
• Only grows if real GDP grows faster than the population grows.

Question 4

What are two reasons Real GDP can increase?

Answer 4

• Economy might be returning to full employment during an expansion phase of the business cycle. (not economic growth)
• Potential GDP might be increasing. (This is economic growth)

Question 5

Potential GDP

Answer 5

• It is the quantity of real GDP produced when the quantity of labour employed is the full-employment quantity.

Question 6

What determines potential GDP?

Answer 6

• An aggregate production function.
• An aggregate labour market.
  *Assume quantities of capital and the state of technology are fixed.

Question 7

Aggregate production function

Answer 7

Tells us how real GDP changes as the quantity of labour changes when all other influences on production remain the same.
- An increase in employment increases real GDP.

Question 8

Demand for labour

Answer 8

Shows the quantity of labour demanded and the real wage rate.

Question 9

Supply of labour

Answer 9

Shows the quantity of labour supplied and the real wage rate.

Question 10

When is the labour market at equilibrium at the real wage rate?

Answer 10

Where the quantity of labour demanded equals the quantity of labour supplied.

Question 11

What does it mean when the real wage rate is lower in value?

Answer 11

The amount of labour demanded is more than the labour supplied.

Question 12

What does it mean when the real wage rate is higher in value?

Answer 12

The amount of labour demanded is less than the labour supplied.

Question 13

Where is employment when the labour market is at equilibrium?

Answer 13

It is at full employment.

Question 14

Aggregate hours

Answer 14

The total number of hours worked by all the people employed.

Question 15

How do aggregate hours change?

Answer 15

• Average hours per worker
• Employment-to-population ratio
• The working-age population growth

Question 16

How to increase real GDP per person?

Answer 16

Labour must become more productive.

Question 17

What are the effects of population growth?

Answer 17

• Increase in population increases the supply for labour
• No change in demand for labour leads to equilibrium real wage rate falling and aggregate hours increasing.
• As aggregate hours increase, potential GDP increases.

Question 18

Labour productivity

Answer 18

• It is the quantity of real GDP produced by an hour of labour.
• Firms are willing to pay more for a given number of hours when labour becomes more productive. (demand for labour increases)

Question 19

What are the three things that influence the pace of labour productivity growth?

Answer 19

• Physical capital growth: accumulation of new capital increases capital per worker and increases labour productivity.
• Human capital growth: Education, on-the-job training, and learning-by-doing is the most fundamental source of labour productivity growth.
• Technological advances: contributes immensely to increasing labour productivity.