GDP Growth

Potential GDP = Productive Capacity This is graphically shown by production possibilities curve: capital goods consumer goods

What determines productive capacity? Quantity and quality of resources available Level of technology

While productive capacity is fixed in the short-run, long-run economic growth can occur, resulting in an increase in potential output: Capital goods Consumer goods

What is the primary source of long-run economic growth? Increases in productivity: output per worker.

What are the sources of productivity growth? Increases in human capital per worker Increases in physical capital per worker Technological advances

Institutional Structures that Promote Growth Strong property rights, supported by rule of law Competitive markets High levels of savings and investment (which increases capital formation) and efficient financial system to facilitate these transactions Adequate infrastructure (highways, bridges, airports, etc) usually provided by government Political stability Public policy supporting economic growth (for ex., investment in capital can be stimulated by tax credits)

How fast can the US GDP grow without causing inflation? Sustainable noninflationary annual GDP growth rate about 2 to 3% in the U.S.