Growth rate of real GDP

=

Real GDP in Crrnt yr. - Real GDP in prvs yr. _{X 100}

Real GDP in previous yr.

• Tells us how rapidly the total economy is expnding
• It is useful for telling us about potential changes in the balance of power among nations
• But it does not tell us about changes in the standard of living

How is real GDP per person useful?

It tells us the changes in standard of living

Growth rate of real GDP per person

=

Growth rate of real GDP

_

Growth rate of population

How does real GDP increase or decrease?

The number of years it takes for the level of any variable to double approximately 70

divided by the

annual percentage growth rate of variable

All influences on real GDP growth can be divided into those that increase:(2)

1. Aggregate Hours
2. Labour Productivity

1. investments
2. savings

This growth comes from the growth in the labour force rather than from the growth in average hours per worker

Labour productivity = Real GDP

                                 Aggregate Hours

1. Saving and investment in physical capital
2. Expansion of human capital
3. Discovery of new technologies

Productivity curve

1. An increase in capital per hour of labour brings movement along the productivity curve
2. An increase in human capital or technological advances

1. Classical Growth
2. Neoclassical growth
3. New Growth

• The theory that the clash between an exploding populaiton and limited resources will eventually bring economic growth to an end
• Also known as Malthusian theory or Doomsday theory
• Proposed by Adam Smith, Thomas Robert Malthus and David Ricard - 3 leading economist during the late 18th and early 19th century

Neoclassical Growth Theory

• The theory that real GDP per person will increase as long as technology keeps advancing
• Developed by Robert Solow of MIT during the 1960's

1. Human capital grows because of choices
2. Discoveries results from choices
3. Discoveries bring profit and competition destroys profit