Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Economic growth is a long-run rise in an economy’s capacity to produce. It is measured by the growth rate of real GDP per capita.
- The aggregate production function links output to labour, physical capital, human capital and technology.
- Other things equal, more employment means more output: firms need more workers to produce more.
- Labour productivity is output per employed worker. It rises with physical capital per worker, human capital per worker and better technology.
- Output per capita rises with physical and human capital per capita.
- Growth is an outward shift of the PPC and a rightward shift of LRAS: the same rise in full-employment output, drawn two ways.
Key relationships
| Measure | Formula | Notes |
|---|---|---|
| Real GDP | nominal GDP ÷ GDP deflator × 100 | removes inflation |
| Real GDP per capita | real GDP ÷ population | average output per person |
| Growth rate | (new − old) ÷ old × 100 | use per capita values for growth in living standards |
| Shortcut | growth of real GDP − growth of population | approximate only |
| Labour productivity | real GDP ÷ employed workers | output per worker, not per person |
| Real GDP | employment × productivity | growth can come from either |
Assumptions behind the models
- The PPC and LRAS show full-employment output with given resources and technology.
- “Other things equal” when linking employment to output: capital and technology are held constant.
- Recovery from a recession (inside the PPC to on it) is not long-run growth.
Mistakes to avoid
- Using nominal GDP to measure growth.
- Forgetting to divide by the population.
- Dividing by the population instead of employment when asked for productivity.
- Calling a rightward AD shift economic growth.
- Saying a higher price level shifts LRAS.
- Forgetting that a bigger population with the same capital means less capital per worker.
Quick self-check
VD is the valda, the currency of the fictional country Valdoria used in the study guide.
- Real GDP is VD 720 billion and the population is 36 million. What is real GDP per capita? (VD 20,000)
- Next year real GDP is VD 756 billion and the population is 36.9 million. What is the growth rate of real GDP per capita? (VD 20,487.80; growth 2.44%)
- Real GDP is VD 450 billion and 18 million people are employed. What is labour productivity? (VD 25,000 per worker)
- Name the three determinants of labour productivity. (Physical capital per worker, human capital per worker, technology)
Next: practice questions.