AP MACRO MR. LIPMAN

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AP MACROMR. LIPMAN

• KRUGMAN MODULES 37-40
• ECONOMIC GROWTH PRODUCTIVITY

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• Module 37
• Standard of living (or quality of life) can be
  measured, in part, by how well the economy is
  doing
• But it needs to be adjusted to reflect the size
  of the nations population.
• Real GDP per capita is real GDP divided by the
  total population. It identifies on average how
  many products each person makes.
• Real GDP per capita is the best measure of a
  nations standard of living.

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There are some problems with using GDP to measure
a nations true standard of living
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The top 5 most populated countries
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GDP Per Capita
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• Real GDP per Capital

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Real GDP per Capital
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Growth Rates

• Rule of 70

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The Sources of Long-Run Growth

• Physical Capital
• (Machinery)
• Human Capital
• (Education)
• Technology
• (new methods of production)

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Sample Problem

• Real per capita GDP is
• A) real GDP divided by the population
• B) real GDP divided by the amount of capital
  available in the economy
• C) not a good useful measure of human welfare
• D) the depth of the ocean floor for sea monsters
• E) measures the value of the nations financial
  markets

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Sample Problem

• Real per capita GDP is
• A) real GDP divided by the population
• B) real GDP divided by the amount of capital
  available in the economy
• C) not a good useful measure of human welfare
• D) the depth of the ocean floor for sea monsters
• E) measures the value of the nations financial
  markets

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Sample Problem

• The key statistic to measure economic growth is
• A) the size of the governments budget
• B) real GDP per capita
• C) life expectancy
• D) the Dow Jones stock market index
• E) the size of the national debt

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Sample Problem

• The key statistic to measure economic growth is
• A) the size of the governments budget
• B) real GDP per capita
• C) life expectancy
• D) the Dow Jones stock market index
• E) the size of the national debt

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Sample Problem

• If a country has a population of 1,000 an area of
  100 square miles, and a GDP of 5,000,000, then
  its GDP per capita is
• A) 500
• B) 5,000
• C) 50,000
• D) 5,000,000
• E) 50

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Sample Problem

• If a country has a population of 1,000 an area of
  100 square miles, and a GDP of 5,000,000, then
  its GDP per capita is
• A) 500
• B) 5,000
• C) 50,000
• D) 5,000,000
• E) 50

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Sample Problem

• The rule of 70 indicates that a 6 annual
  increase in the potential level of real GDP would
  lead to the potential output doubling in about
  _____years.
• A) 6
• B) 12
• C) 24
• D) 30
• E) 35

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Sample Problem

• The rule of 70 indicates that a 6 annual
  increase in the potential level of real GDP would
  lead to the potential output doubling in about
  _____years.
• A) 6
• B) 12
• C) 24
• D) 30
• E) 35

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Sample Problem

• If real GDP doubles in 35 years, its average
  annual growth rate is approximately______?
• A) 1
• B) 2
• C) 3
• D) 4
• E) 7

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Sample Problem

• If real GDP doubles in 35 years, its average
  annual growth rate is approximately______?
• A) 1
• B) 2
• C) 3
• D) 4
• E) 7

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Sample Problem

• The Rule of 70 applies
• A) only to GDP
• B) only to GDP per capita
• C) to any growth rate
• D) only to developed countries
• E) only in games of horseshoes

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Sample Problem

• The Rule of 70 applies
• A) only to GDP
• B) only to GDP per capita
• C) to any growth rate
• D) only to developed countries
• E) only in games of horseshoes

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Module 38

• PRODUCTIVITY AND GROWTH

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Accounting for Growth The Aggregate Production
Function

• Aggregate Production Function
• Diminishing Returns to Physical Capital
• Growth Accounting
• Total Factor Productivity

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What About Natural Resources?

• Other things equal, more natural resources leads
  to higher GDP per capita
• Other things are often NOT equal (Political /
  Legal instability)
• Malthus

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Success, Disappointment, and Failure

• East Asias Miracle
• convergence hypothesis
• Latin Americas Disappointment
• Africas Troubles

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Are Economies Converging?
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Sample Problem

• In the long run an increase in saving will
  generally
• A) reduce the rate of economic growth
• B) leave the rate of economic growth unchanged
• C) increase the rate of economic growth
• D) increase consumption simultaneously
• E) decrease the standard of living

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Sample Problem

• In the long run an increase in saving will
  generally
• A) reduce the rate of economic growth
• B) leave the rate of economic growth unchanged
• C) increase the rate of economic growth
• D) increase consumption simultaneously
• E) decrease the standard of living

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Sample Problem

• Which of the following will NOT increase the
  productivity of labor?
• A) technological improvements
• B) an increase in the capital stock
• C) improvements in education
• D) an increase in the size of the labor force
• E) a lower literacy rate

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Sample Problem

• Which of the following will NOT increase the
  productivity of labor?
• A) technological improvements
• B) an increase in the capital stock
• C) improvements in education
• D) an increase in the size of the labor force
• E) a lower literacy rate

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Sample Problem

• Investment in human capital shifts the aggregate
  production function
• A) downward
• B) leftward
• C) inward
• D) rightward
• E) upward

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Sample Problem

• Investment in human capital shifts the aggregate
  production function
• A) downward
• B) leftward
• C) inward
• D) rightward
• E) upward

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Sample Problem

• Physical capital would include
• A) the education or knowledge a worker has in his
  or her physical being
• B) the tools a worker has to work with
• C) the money available for the worker to use
• D) the stocks and bonds in an individuals
  portfolio
• E) the natural resources a worker has to work with

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Sample Problem

• Physical capital would include
• A) the education or knowledge a worker has in his
  or her physical being
• B) the tools a worker has to work with
• C) the money available for the worker to use
• D) the stocks and bonds in an individuals
  portfolio
• E) the natural resources a worker has to work with

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Module 39 Economic Growth Policy

• Investment Spending leads to an increase in
  physical capital
• Investment Spending comes from domestic savings
  or inflows of foreign capital
• Business RD is a key to increasing physical
  capital

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• The Role of Government in Promoting Economic
  Growth
• Governments and Physical Capital
• infrastructure
• Governments and Human Capital
• Governments and Technology
• Political Stability, Property Rights and
  Excessive Intervention

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AN EXAMPLE OF HOW INVESTMENT IN HUMAN CAPITAL CAN
LEAD TO INCREASED GROWTH AND A HIGHER GDP PER
CAPITA
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THE REAL PRICE OF OIL IS BASED ON DEMAND AND NOT
IMPORTATION ISSUE (SEE THE NEXT SLIDE)
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AS THE ECONOMY GROWS CONSUMPTION (DEMAND) GROWS
WITH IT AND THIS, NOT IMPORTATION ISSUES, ARE THE
CAUSE OF HIGHER PRICES AT THE GAS PUMP TODAY
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THE ISSUE OF GROWTH AND ENVIORNMENTAL DAMAGE IS A
WORLD-WIDE ISSUE AND NOT A UNITED STATES ISSUE
ALONE
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ENVIORNMENTAL CONCERNS

• Pollution is a negative externality because it
  allows firms to impose a cost on society without
  having to pay compensation
• Many have called for cap and trade policies
  which impose costs and limits/purchases/trades on
  firms who are engaged in pollution type
  industries.

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MODULE 40

• LONG-RUN ECONOMIC GROWTH IS BASED UPON THE
  SUSTAINED RISE IN THE PRODUCTION OF GOODS AND
  SERVICES
• SHORT-RUN UPS AND DOWNS ARE THE RESULT OF THE
  BUSINESS CYCLE

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Long-run Economic Growth and the Production
Possibilities Curve
C
C
K
K
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Remember this? Economic Growth and Potential
Growth for the Production Possibility Curve
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Actual and Potential Output from 1989 to 2009
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• In the AD/AS model, a short-run fluctuation of
  the business cycle would be seen as a shift of
  the AD curve or SRAS curve. For example, a
  recessionary gap may result in a decrease in
  input prices and an increase in SRAS, but that
  does not mean the same thing as economic growth.
  Likewise, an inflationary gap results not in
  growth, but in a return of the economy to its
  long run equilibrium.

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You must distinguish between long-run growth and
short-run business cycle (SRAS)
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The Long-run Aggregate Supply Curve
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Long-run Growth and the LRAS Curve
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From the Short Run to the Long Run Notice the
impact of wages on SRAS since wages are an input