This chapter analyzes economic growth by examining the aggregate production function. Sources of economic growth are identified and growth rates of different countries are compared.
Growth and the Long-Run Aggregate Supply Curve
- The aggregate production function relates the level of employment to the level of real GDP produced per period.
- The real wage and the natural level of employment are determined by the intersection of the demand and supply curves for labor. Potential output is given by the point on the aggregate production function corresponding to the natural level of employment. This output level is the same as that shown by the long-run aggregate supply curve.
- Economic growth can be shown as a series of shifts to the right in LRAS. Such shifts require either upward shifts in the production function or increases in demand for or supply of labor.