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Learning Objectives
1. 2. 3. 4. 5. Calculate economic growth rates. Explain the role of capital in economic growth. Apply growth accounting to measure technological progress. Discuss the sources of technological progress. Assess the role of government in assisting economic growth.
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Because real GDP is the indicator of economic growth, real GDP is a starting point for measuring such growth. A countrys economic growth can be measured from one year to the next using real GDP. If we want to measure how real GDP affects the population, then we need a different measurement. The measurement we use for this purpose is called real GDP per capita. Real GDP per capita is gross domestic product per person adjusted for changes in prices. It is the usual measure of living standards across time and between countries.
If we compare people in the United States who lived in the 18th century to people today, we can see they have different economic conditions. For example, people in the 1700s used the fireplace as a place for cooking meals and keeping warm. People today use the fireplace for warmth and decoration. As income increases, standards of living tend to improve. The more income you have in a country, the more its people can afford. A reason to measure economic growth and understand how to make economic growth happen is to improve standards of living. Comparing countries allows economists and policymakers to decide what policy would improve standards of living. Another way to measure economic growth over time is to use growth rates. A growth rate is the percentage rate of change of a variable from one period to another. You already used growth rates when you calculated inflation rates. This time you will use real GDP as your measure of growth. If you wish to know how long it takes for a country to double its real GDP, you can use the rule of 70. The rule of 70 is a rule of thumb that says output will double in 70/x years, where x is the percentage rate of growth. The following are the formulas useful for understanding economic growth: