5.6 Economic Growth

a. Define measures and determinants of economic growth. b. Explain (using graphs and data as appropriate) the determinants of economic growth. c. Calculate (using graphs and data as appropriate) per capita GDP and economic growth.

• Economic growth can be measured as the growth rate in real GDP per capita over time.
• Aggregate employment and aggregate output are directly related because firms need to employ more workers in order to produce more output, holding other factors constant. This is captured by the aggregate production function.
• Output per employed worker is a measure of average labor productivity.
• Productivity is determined by the level of technology and physical and human capital per worker.
• The aggregate production function shows that output per capita is positively related to both physical and human capital per capita.
• Enduring understanding MEA-2: The economy fluctuates between periods of expansion and contraction in the short run, but economic growth can occur in the long run.

Explain (using graphs as appropriate) how the PPC is related to the long-run aggregate supply (LRAS) curve.

• An outward shift in the PPC is analogous to a rightward shift of the long-run aggregate supply curve. [See LO MOD-2.I]
• Enduring understanding MOD-1: The production possibilities curve (PPC) model is used to demonstrate the full employment level of output and to illustrate changes in full employment.