ChapterChapter

EconomicEconomic

GrowthGrowth16

Objective:

Students explain what causes economic

growth.

Aggregate Supply

• Economic growth=increase in real GDP• Aggregate supply is the total quantity of

goods and services produced in the economy at that time.

Q: How does aggregate supply differ from supply in general?

Like the supply curves you studied in Chapter

5, it is determined, at least in part, by the desire

of firms to earn a profit. That is why the graph

shows output increasing as the price level

rises.

Aggregate Demand

• Aggregate demand is a term that describes the various quantities of goods and services that all people, taken together, are willing and able to buy at various price levels in a specific period of time.

• It represents all of the demand within the economy.

• Keep in mind that when economists speak of aggregate demand, they are referring to an average price level, not to the price of any single product.

• Among the factors that affect aggregate demand is a change in savings.

• If consumers save less and spend more, the increase in consumer spending increases aggregate demand.

• In much the same way, an increase in savings can result in a decrease in aggregate demand—leaving consumers with less money to spend.

Macroeconomic Equilibrium

• At any other level of output or price, the economy tends to be unstable.

• It is not likely to last, and eventually the economy will return to point Q.

• Macroeconomic equilibrium is the point at which aggregate supply balances aggregate demand.

• Think equilibrium price but on a national level.

Examining Economic Growth

• Real economic growth occurs when GDP increases faster than the population.

• The result is an improvement in the overall standard of living.

Have you ever ordered a

pizza only to have a couple

of hungry friends show up

unexpectedly?

GDP & Population Growth• Regression= pop. Growth but no GDP growth

• Stagnation= both increase at same rate

• GDP per capita (per person)= better measure of the effects of growth than Real GDP

Standard of Living

• The term standard of living refers to the overall quality of life.

• It is usually measured by real GDP per capita.

Comparing Standards of Living

Suburban community in Niger, Africa Suburban community in the United States

Sources of Economic Growth

Factors of Production• Natural Resources• Labor• Capital• Entrepreneurship

Productivity Gains• increases in the skills of

workers.• increases in the ratio of

capital to labor.• improved use of all

factors of production.• the development and use

of better equipment and products.

Sources of Economic Growth

Productivity Gains Come From

2. increases in the skills of workers.

3. increases in the ratio of capital to labor.

4. improved use of all factors of production.

5. the development and use of better equipment and products.

2. More productive workersEx: education/on-the-job training

3. Capital InvestmentEx: tools/equipment

4. ManagementEx: good decisions

5. Research & DevelopmentEx: improvements/inventions

Tools wear out

and depreciate

Capital

Investment: buy

new tools

Research &

Development:

Latest greatest

tools

Buy New,

Improved

Equipment:

often before old

ones wear out

R&D + Capital Investment = Economic Growth

Review: Terms to Know

• Aggregate Supply• Aggregate Demand• Macroeconomic Equilibrium• Economic Regression• Economic Stagnation• GDP per capita• Standard of Living• Research & Development

Can You Answer?

1. How does aggregate supply differ from supply in general? Aggregate demand?

2. What is the relationship between economic growth and population growth?

3. What is the relationship between economic growth and standard of living?

4. What are four sources of economic growth?