Chapter 7 Economic growth.ppt

Chapter 7 Economic growth Questions: 1) What’s the core idea of macroeconomics in the long run? 2) Why is growth rate so important? 3) How to increase GDP per capita? 4) What’s the cost of economic growth? Question 1 What’s the core idea of macroeconomics in the long run? GDP in the long run The potential GDP : Full-employment GDP Or GDP at the rate of natural unemployment Potential GDP In the long run, the macroeconomics focus on the supply side of the economy The core idea of macroeconomics in the long run: The production ability of the economy determines the growth of potential GDP Question 2 Why is growth rate so important? Effect of different growth rates Huge effects from tiny differences Arithmetic of Growth rate The 70 rule: The time GDP needs to double equals 70 being divided by the growth rate of GDP Poverty statistics In the poorest one-fifth of all countries, daily caloric intake is 1/3 lower than in the richest fifth the infant mortality rate is 200 per 1000 births, compared to 4 per 1000 births in the richest fifth. Estimated effects of economic growth A 10% increase in income is associated with a 6% decrease in infant mortality Income growth also reduces poverty. Example: Question 3 How to increase GDP per capita? The Production Function Y = A F (K, L) Y: potential GDP 1)factors K: capital goods L: labor 2) productivity (total factor productivity) A: human capital, technology, institutions Account for economic Growth 1929-2000 (US) Standard of Economic Growth Growth of GDP per capita Ageing population Rapid expansion of aged population The proportion of aging population(65+) in the future Standard of Economic Growth Growth of GDP per capita How to increase labor productivity? Y = A F (K, L) Y/L= A f (K/L) 1)K: capital goods 2) A: human ca