AP MACROMR. LIPMAN

KRUGMAN MODULES 37-40ECONOMIC GROWTH &

PRODUCTIVITY

Module 37Standard of living (or quality of life) can be

measured, in part, by how well the economy is doing…

But it needs to be adjusted to reflect the size of the nation’s population.

• Real GDP per capita is real GDP divided by the total population. It identifies on average how many products each person makes.

Real GDP per capita is the best measure of a nation’s standard of living.

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There are some problems with using GDP to measure a nation’s true standard of living

The top 5 most populated countries

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GDP Per Capita

5

•Real GDP per Capital

Real GDP per CapitalReal GDP per Capital

Growth RatesGrowth Rates

Rule of 70

The Sources of Long-Run GrowthThe Sources of Long-Run Growth

Physical Capital(Machinery)

Human Capital (Education)

Technology (new methods of production)

Sample Problem

• Real per capita GDP is:A) real GDP divided by the populationB) real GDP divided by the amount of capital

available in the economyC) not a good useful measure of human welfareD) the depth of the ocean floor for sea monstersE) measures the value of the nation’s financial

markets

Sample Problem

• Real per capita GDP is:A) real GDP divided by the populationB) real GDP divided by the amount of capital

available in the economyC) not a good useful measure of human welfareD) the depth of the ocean floor for sea monstersE) measures the value of the nation’s financial

markets

Sample Problem

• The key statistic to measure economic growth is:A) the size of the government’s budgetB) real GDP per capitaC) life expectancyD) the Dow Jones stock market indexE) the size of the national debt

Sample Problem

• The key statistic to measure economic growth is:A) the size of the government’s budgetB) real GDP per capitaC) life expectancyD) the Dow Jones stock market indexE) the size of the national debt

Sample Problem

• If a country has a population of 1,000 an area of 100 square miles, and a GDP of $5,000,000, then its GDP per capita is:A) $500B) $5,000C) $50,000D) 5,000,000E) $50

Sample Problem

• If a country has a population of 1,000 an area of 100 square miles, and a GDP of $5,000,000, then its GDP per capita is:A) $500B) $5,000C) $50,000D) 5,000,000E) $50

Sample Problem

• The rule of 70 indicates that a 6% annual increase in the potential level of real GDP would lead to the potential output doubling in about _____years.A) 6B) 12C) 24D) 30E) 35

Sample Problem• The rule of 70 indicates that a 6% annual

increase in the potential level of real GDP would lead to the potential output doubling in about _____years.A) 6B) 12C) 24D) 30E) 35

Sample Problem• If real GDP doubles in 35 years, its average

annual growth rate is approximately______?A) 1%B) 2%C) 3%D) 4%E) 7%

Sample Problem

• If real GDP doubles in 35 years, its average annual growth rate is approximately______?A) 1%B) 2%C) 3%D) 4%E) 7%

Sample Problem• The Rule of 70 applies:

A) only to GDPB) only to GDP per capitaC) to any growth rateD) only to developed countriesE) only in games of horseshoes

Sample Problem

• The Rule of 70 applies:

A) only to GDPB) only to GDP per capitaC) to any growth rateD) only to developed countriesE) only in games of horseshoes

Module 38

PRODUCTIVITY AND GROWTH

Accounting for Growth: The Accounting for Growth: The Aggregate Production FunctionAggregate Production Function

• Aggregate Production Function

• Diminishing Returns to Physical Capital

• Growth Accounting

• Total Factor Productivity

What About Natural Resources?What About Natural Resources?

•Other things equal, more natural resources leads to higher GDP per capita

•Other things are often NOT equal (Political / Legal instability)

•Malthus

Success, Disappointment, and FailureSuccess, Disappointment, and Failure

• East Asia’s Miracle• convergence hypothesis

• Latin America’s Disappointment

• Africa’s Troubles

Are Economies Converging?

Sample Problem

• In the long run an increase in saving will generally:A) reduce the rate of economic growthB) leave the rate of economic growth unchangedC) increase the rate of economic growth D) increase consumption simultaneouslyE) decrease the standard of living

Sample Problem

• In the long run an increase in saving will generally:A) reduce the rate of economic growthB) leave the rate of economic growth unchangedC) increase the rate of economic growth D) increase consumption simultaneouslyE) decrease the standard of living

Sample Problem

• Which of the following will NOT increase the productivity of labor?A) technological improvementsB) an increase in the capital stockC) improvements in educationD) an increase in the size of the labor forceE) a lower literacy rate

Sample Problem

• Which of the following will NOT increase the productivity of labor?A) technological improvementsB) an increase in the capital stockC) improvements in educationD) an increase in the size of the labor forceE) a lower literacy rate

Sample Problem

• Investment in human capital shifts the aggregate production function:A) downwardB) leftwardC) inwardD) rightwardE) upward

Sample Problem

• Investment in human capital shifts the aggregate production function:A) downwardB) leftwardC) inwardD) rightwardE) upward

Sample Problem

• Physical capital would include:A) the education or knowledge a worker has in his

or her physical beingB) the tools a worker has to work withC) the money available for the worker to useD) the stocks and bonds in an individual’s portfolioE) the natural resources a worker has to work with

Sample Problem

• Physical capital would include:A) the education or knowledge a worker has in his

or her physical beingB) the tools a worker has to work withC) the money available for the worker to useD) the stocks and bonds in an individual’s portfolioE) the natural resources a worker has to work with

Module 39: Economic Growth Policy

• Investment Spending leads to an increase in physical capital

• Investment Spending comes from domestic savings or inflows of foreign capital

• Business R&D is a key to increasing physical capital

• The Role of Government in Promoting Economic Growth

• Governments and Physical Capital

• infrastructure

• Governments and Human Capital

• Governments and Technology

• Political Stability, Property Rights and Excessive Intervention

AN EXAMPLE OF HOW INVESTMENT IN HUMAN CAPITAL CAN LEAD TO INCREASED GROWTH AND A HIGHER GDP PER CAPITA

THE REAL PRICE OF OIL IS BASED ON DEMAND AND NOT IMPORTATION ISSUE: (SEE THE NEXT SLIDE)

AS THE ECONOMY GROWS CONSUMPTION (DEMAND) GROWS WITH IT AND THIS, NOT IMPORTATION ISSUES, ARE THE CAUSE OF HIGHER PRICES AT THE GAS PUMP TODAY

THE ISSUE OF GROWTH AND ENVIORNMENTAL DAMAGE IS A WORLD-WIDE ISSUE AND NOT A UNITED STATES ISSUE ALONE

ENVIORNMENTAL CONCERNS

• Pollution is a negative externality because it allows firms to impose a cost on society without having to pay compensation

• Many have called for “cap and trade” policies which impose costs and limits/purchases/trades on firms who are engaged in pollution type industries.

MODULE 40

• LONG-RUN ECONOMIC GROWTH IS BASED UPON THE SUSTAINED RISE IN THE PRODUCTION OF GOODS AND SERVICES

• SHORT-RUN “UPS” AND “DOWNS” ARE THE RESULT OF THE BUSINESS CYCLE

Long-run Economic Growth and the Long-run Economic Growth and the Production Possibilities CurveProduction Possibilities Curve

K’K

C’

C

Remember this? Economic Growth and Potential Growth for the Production Possibility Curve

Actual and Potential Output from 1989 to 2009

• In the AD/AS model, a short-run fluctuation of the business cycle would be seen as a shift of the AD curve or SRAS curve. For example, a recessionary gap may result in a decrease in input prices and an increase in SRAS, but that does not mean the same thing as economic growth. Likewise, an inflationary gap results not in growth, but in a return of the economy to it’s long run equilibrium.

You must distinguish between long-run growth You must distinguish between long-run growth and short-run business cycle (SRAS)and short-run business cycle (SRAS)

The Long-run Aggregate Supply Curve

Long-run Growth and the LRAS Curve

From the Short Run to the Long Run: Notice the impact of wages on SRAS since wages are an input