Economic Growth, Part I

It is important to understand that an increase in Real GDP
doesn't necessarily mean if RGDP is increasing this represents
Economic Growth. Economic Growth occurs when the
economy grows in the long-run. As you well know, Real GDP
can increases because of a rightward shift of AD or SRAS,
both representing short-run shifts. This is not an increase in
Economic Growth. For Economic Growth to occur there must
be a shift in LRAS.

On the graphs below when you press the play button, notice it
will look as though the Business Cycle is causing the changes
on the PPF and ASAD graphs, but in reality, it is the change in
AD that is causing the change on the Business Cycle graph
and on the PPF graph.

As the graphs change before your eyes, notice that an increase
in AD causes an expansionary cycle on the Business Cycle
graph and an increase from one point to another point on the
PPF graph. All of this is a SHORT RUN increase in RGDP
and NOT an increase in Economic Growth. Notice the PPF
CURVE itself did not change (which would indicate Economic
Growth) and the LRAS on the ASAD graph did not change
(which would indicate Economic Growth).

On the graphs below when you press the play button, notice
that an increase in SRAS causes an expansionary cycle on
the Business Cycle graph and an increase from one point to
another point on the PPF graph. All of this is a SHORT RUN
increase in RGDP, and NOT an increase in Economic Growth.
Notice the PPF CURVE did not change (which would indicate
Economic Growth) and the LRAS on the ASAD graph did not
change (which would indicate Economic Growth).

To help you better understand this concept of a SHORT-RUN
shift in AD and SRAS (indicating a change in RGDP and not
a change in Economic Growth) use the ASAD and PPF
graphs below to describe each of the following:

On the ASAD graph--The economy is shown in a recessionary
gap. Show what happens to RGDP and PL when there is an
increase in AD.

On the PPF graph--Show the economy in a recessionary gap
by dragging Point A onto the graph. Show what happens to the
production of captial and consumption goods when the
recessionary gap begins to close by dragging Point B onto the
graph.

To make sure you know the difference between short-run
increase in RGDP (through a shift in AD or SRAS) and long-run
increase in Economic Growth (through a shift in LRAS), drag
the items in the column labeled Components or Determinants
(inside the blue rectangles) to the appropriate yellow rectangles
in the AD, SRAS, or LRAS columns.

The slide show lesson below on Productivity was written in 2005.
Many of the same concepts that held true back then hold true today.

The important point to remember is public policies that impact
productivity and labor force participation affect RGDP per capita
and Economic Growth.

When you look at the correct answers above regarding an increase
in AD and SRAS, these increase aggregate employment and RGDP
because firms tend to employ more workers in order to produce
more output, holding other factors constant.

When you look at the correct answers above regarding an increase
in LRAS, these increase Economic Growth. These answers are
what change RGDP in the long run.

Supply-side fiscal policies affect aggregate demand, aggregate
supply, and potential output in the short-run and long run by
influencing incentives that affect household and business
economic behavior.

If you did everything correctly on the ASAD graph, you noticed
that a rightward shift in AD causes an increase in RGDP and PL.
For a change in Economic Growth to occur, though, you would
have to shift both the LRAS and SRAS to the right and you will
see an increase in potential output (Economic Growth) and
RGDP.

If you did everything correctly on the PPF graph, you dragged
Point A inside the curve and Point B anywhere above Point A.
This is an increase in production. For a change in Economic
Growth to occur, you would have to shift the entire PPF curve
to the right.

When figuring the formulas below, you will be using Real GDP and
not Nominal GDP. As you recall from an earlier chapter on Real
GDP, the Nominal GDP includes inflation (expressed in what is
called Current Dollars) and Real GDP does not include inflation
(expressed in what is called Constant Dollars).

Notice on the graph above that prior to 2012, the Real GDP is
greater than the Nominal GDP. This doesn't mean that deflation
occurred prior to 2012, but rather the Bureau of Labor Statistics
periodically changes the BASE YEAR to get a more accurate
measurement of how a country’s actual output changes over
time. It can best be describe as the new starting point, sort of
like an adolescent reaching a new starting point of becoming an
adult (no longer being a minor).

To calculate the formulas for Economic Growth you will be using
the information from the the graphs below. The graph on the left
shows the U.S. Real GDP; the graph on the right shows the U.S.
population, civilian labor force, working age population, and
population level; and the graph underneath the Formulas shows
the hours worked by full-time and part-time employees. Use your
finger or cursor by touching the lines on the graphs to find the
information that is used in the calculations below.

In this lesson on Economic Growth, you learned the following
concepts:

*What happens to the Business Cycle and PPF graphs when
  AD shifts to the right or left?
*What happens to the Business Cycle and PPF graphs when
  SRAS shifts to the right or left?
*What change in Components or Determinants shift AD
  which increases RGDP?
*What change in Components or Determinants shift SRAS
  which increases RGDP?
*What change in Components or Determinants shift LRAS
  which increases Economic Growth and RGDP?
*What does an increase in Productivity do to Economic
  Growth?
*What are the Concepts and Formulas that are used to
  determine Economic Growth?

If real interest rates climb because of an increase in public sector
(government) borrowing to pay for its deficit spending, this
increase in real interest rates reduces households' and firms'
borrowing, thus crowding out the private sector in the loanable
funds market. This reduction in private borrowing reduces
consumption and investment, which reduces AD, which reduces
RGDP. If there is a reduction in borrowing for long-run projects
that reduces LRAS, then this will reduce both RGDP and Economic
Growth.

Realize that short-run situations can affect long-run Economic
Growth. For example, if firms increase investment (increase in AD)
and this investment is used for the purpose of increasing
productivity or used for the purchase of capital stock (factories,
equipment, machinery) then LRAS will shift to the right, which
increases full-employment output (RGDP) and Economic Growth.