AP Macroeconomics

1
AP Macroeconomics

• Economic Growth Productivity

2
Economic Growth Defined

• Sustained increase in Real GDP over time.
• Sustained increase in Real GDP per Capita over
  time.

3
Why Grow?

• Growth leads to greater prosperity for society.
• Lessens the burden of scarcity.
• Increases the general level of well-being.

4
Conditions for Growth

• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in
  order to grow
• Saving
• Trade

5
Physical Capital

• Tools, machinery, factories, infrastructure
• Physical Capital is the product of Investment.
• Investment is sensitive to interest rates and
  expected rates of return.
• It takes capital to make capital.
• Capital must be maintained.

6
Technology Productivity

• Research and development, innovation and
  invention yield increases in available
  technology.
• More technology in the hands of workers increases
  productivity.
• Productivity is output per worker.
• More Productivity Economic Growth.

7
Human Capital

• People are a countrys most important resource.
  Therefore human capital must be developed.
• Education
• Economic Freedom
• The right to acquire private property
• Incentives
• Clean Water
• Stable Food Supply
• Access to technology

8
Growth Illustrated
SRAS
LRAS
PL
P
AD
GDPR
YF
9
Growth Illustrated
LRAS
PL
SRAS
P
AD
GDPR
YF
10
Growth Illustratedor
.
.
?
Capital Goods
?
PPC
PPC1
?
Consumer Goods
11
Hindrances to Growth

• Economic and Political Instability
• High inflationary expectations
• Absence of the rule of law
• Diminished Private Property Rights
• Negative Incentives
• The welfare state
• Lack of Savings
• Excess current consumption
• Failure to maintain existing capital
• Crowding Out of Investment
• Government deficits debt increasing long term
  interest rates!
• Increased income inequality ? Populist policies
• Restrictions on Free International Trade

12
FRQ 2005 FORM B

• 2. Labor productivity is output per unit of
  labor. An increase in labor productivity is a
  source of economic growth.
• (a) Identify two sources of increase in labor
  productivity.
• (b) Assume that a countrys economy is at full
  empl
• oyment. Productivity has been rising. Using a
  correctly
• labeled graph of aggregate demand and aggregate
  supply, show the long-run effect of the growth
• in productivity on each of the following.
• (i) Real output
• (ii) Price level
• (c) Assume that the economy produces only two
  goods, good X and good Y. Using a correctly
  labeled
• production possibility diagram, show the effect
  of the increase in labor productivity