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What is economic growth?

Economic growth is a sustained expansion of production possibilities ie your PPF growing and shifting outwards. Maintained over decades, rapid economic growth can transform a poor nation into a rich one.


What causes economic growth

Economic growth (rise or growth in real GDP) is due to an increase in potential GDP. Thus is when we expand the PPF outwards. When L, K and technology expand we can call it economic growth but also Human capital (H) eg training and skills.


How do we calculate economic growth (real GDP) and real GDP per person?

Growth rate of real GDP = (real GDP in current year - real GDP in previous year divided by real GDP in previous year X 100

Growth rate of real GDP per person= growth rate of real GDP - growth rate of population

Growth rate of population = (population in current year - population in previous year divided by population in previous year X 100


Why is population growth rate important?

Even if the economy grows, if the population grows bigger or faster it can cause a lower rate of real GDP per person thus producing a lower level of living standards.


What is rule of 70

Rule of 70 states that the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable.


Rule of 70 example

How many years will it take to make $100 to $200 if there is a 5% growth each year. 70 divided by 5 = 14 so 14 years. Applies to any variable so it applies to real GDP per person. Aus real GDP per person was growing at a rate of 3 per cent by year during he 60s. If it maintained the standard of living would have doubled in 23 years but it slowed to 1.7 in 70s thus took 41 years.


What is potential GDP and what determines it

Potential GDP is the value of real GDP when all the economy's factors of production are fully employed. It is determined by: efficient utilisation of factors of production/resources/inputs


How do the factors of potential GDP come together to push PPF outward?

First when the economy is at full employment, real GDP equals potential GDP so actual real GDP is determined by the same factors that determine potential GDP. Second, knowing what determines potential GDP provides a checklist of factors that influence its growth rate. Thus once we know what factors influence potential GDP, we can concentrate on increasing those factors so as to boost our country's economic growth.


What is production functions

To make simplistic assumptions about economic growth we look at real GDP and only one factor this assuming all other factors are fixed. What we look at then is known as production function. If quantity of L depends on what we call the choice between work and leisure. If the real wage rate is high enough, more people will want to work as not working has a high OC. The opposite applies if the wage rate is low then more people working does not make too much sense this time to take a holiday


Explain the production function

A relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labour employed changes and all other influences in production remain the same. Like PPF the production function is a boundary between the attainable and unattainable.


What are diminishing returns in regard to the production function?

The production function displays diminishing returns - each additional hour of labour produces a successively smaller additional amount of real GDP. The first 10 billion hours f labour produces $1.1 trillion of real GDP. The second 10 billion hours of labour increase real GDP from 1.1 trillion to 1.6 trillion so second only produces 0.5 trillion of real GDP. Third 10 billion hours of L increases real GDP from 1.6 trill to 2 trill thus third hours produces only 0.4 trillion of real GDP


Why do diminishing returns arise?

Quantity of K and other factors are fixed. As more labour is hired, the additional output produced decreases because the extra workers have less k with which to work.