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.
The Significance of Economic Growth
- Economic growth is the process through which an economy's production possibilities curve shifts outward. We measure it as the rate at which the economy's potential level of output increases.
- Measuring economic growth as the rate of increase of the actual level of real GDP can lead to misleading results due to the business cycle.
- Growth of a quantity at a particular percentage rate implies exponential growth. When something grows exponentially, it doubles over fixed intervals of time; these intervals may be computed using the rule of 72.
- Small differences in rates of economic growth can lead to large differences in levels of potential output over long periods of time.
- To assess changes in average standards of living, we subtract the percentage rate of growth of population from the percentage rate of growth of output to get the percentage rate of growth of output per capita.