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But unless they are able to affect the level of potential output,
they will have no effect on long-run GDP.
Long-Run Economic
Growth
6
These three economic variables show different aspects of economic growth. Each
variable is expressed as an index number.
Rule of 70
Forgone Consumption
In a world of scarcity, almost nothing is free, including
economic growth.
Economic growth, which promises more goods and
services tomorrow, is achieved by consuming fewer
goods today.
This sacrifice of current consumption is an important
cost of economic growth.
16
Social Costs
•Part of growth is accounted for by existing firms expanding and
producing more output, hiring more workers, and using more
equipment and intermediate goods.
•It is often argued that costs of this kind are a small price to pay for
the great benefits that growth can bring.
•But many of the people for whom growth is most costly (in terms of
lost jobs or lowered incomes) share least in the fruits that growth
brings.
18
www.myeconlab.com
20
Public saving = T – G
25
– Investment:
•Firms' investment demand is negatively related to
the real interest rate.
– Saving:
•National saving is positively related to the interest
rate.
26
NS = Y* - T - C + (T - G)
NS = Y* - C - G
Investment demand by
NS = Y*-C-G firms is negatively
Excess related to the real
Supply
interest rate.
i1 • •
The supply of national
i* • E
saving is positively
i2 • • I related to the real
Excess
Demand interest rate.
I*=NS* Loanable Funds
In the long run, with real
GDP equal to Y*, the
equilibrium interest rate
is determined where
desired national saving
equals desired
investment
30
E0
i0*
• E1
Greater flow of investment
i1* • I
leads to a higher growth rate
of potential output.
i1* • E1
Greater flow of saving (and
i0*
E0
• I1
investment) leads to a
I0 higher growth rate of Y*.
GDP = FT(L,K,H)
40 Total
L Units of APL MPL • Output
35 •
Units of Output
Output
1 12.0 12.0 30 •
2 17.0 8.5 5.0 25 •
3 20.8 6.9 3.8 20
•
4 24.0 6.0 3.2 15
5 26.8 5.4 2.8 10
6 29.4 4.9 2.6 2 4 6 8 10
7 31.9 4.6 2.5 Units of Labour
8 34.0 4.2 2.1
9 36.0 4.0 2.0 Holding K constant, increases in L
10 37.9 3.8 1.9
generate positive but diminishing
increments to output.
39
1. Labour-Force Growth
• learning-by-doing
• knowledge transfer
• market structure and innovation
• shocks and innovation
56
The fastest growing nations are the ones with the fastest
growing exports and imports.
67
Resource Exhaustion
• Technology changes continually, as do available stocks of
resources.
• Along with advances in technological knowledge typically
comes an increase in the economy’s resource efficiency—a
reduction in the amount of resources used to produce one
unit of output.
• Technology is constantly advancing, and many things that
seemed impossible a generation ago will be commonplace a
generation from now.
• Such technological advance makes any absolute limits to
economic growth less likely.
- but technological improvements are not automatic —
they do not “just happen”
70
Environmental Degradation
Conclusion