AP Macroeconomics Economic Growth & Productivity

Economic Growth Defined Sustained increase in Real GDP over time. Sustained increase in Real GDP per Capita over time.

Why Grow? Growth leads to greater prosperity for society. Lessens the burden of scarcity. Increases the general level of well- being.

Conditions for Growth Rule of Law Sound Legal and Economic Institutions Economic Freedom Respect for Private Property Political & Economic Stability – Low Inflationary Expectations Willingness to sacrifice current consumption in order to grow Saving Trade

Physical Capital Tools, machinery, factories, infrastructure Physical Capital is the product of Investment. Investment is sensitive to interest rates and expected rates of return. It takes capital to make capital. Capital must be maintained.

Technology & Productivity Research and development, innovation and invention yield increases in available technology. More technology in the hands of workers increases productivity. Productivity is output per worker. More Productivity = Economic Growth.

Human Capital People are a country’s most important resource. Therefore human capital must be developed. Education Economic Freedom The right to acquire private property Incentives Clean Water Stable Food Supply Access to technology

Growth Illustrated GDP R PL AD SRASLRAS YFYF P

Growth Illustrated GDP R PL AD SRAS LRAS YFYF P

Growth Illustrated or PPC Capital Goods Consumer Goods..   PPC 1 

Hindrances to Growth Economic and Political Instability – High inflationary expectations Absence of the rule of law Diminished Private Property Rights Negative Incentives – The welfare state Lack of Savings Excess current consumption Failure to maintain existing capital Crowding Out of Investment – Government deficits & debt increasing long term interest rates! Increased income inequality  Populist policies Restrictions on Free International Trade

FRQ – 2005 FORM B 2. Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth. (a) Identify two sources of increase in labor productivity. (b) Assume that a country’s economy is at full empl oyment. Productivity has been rising. Using a correctly labeled graph of aggregate demand and aggregate supply, show the long-run effect of the growth in productivity on each of the following. (i) Real output (ii) Price level (c) Assume that the economy produces only two goods, good X and good Y. Using a correctly labeled production possibility diagram, show the effect of the increase in labor productivity