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Macroeconomics: Economic growth and growth policies

  •  Economic growth: measures the change in productive capacity of an economy between one period of time and another.
    • If growth is negative, then the economy is experiencing a recession. If growth is positive, then the economy is expending.
    • If the rate of population growth is smaller than the rate of economic growth, then on average people are becoming richer.
    • Measuring economic growth (in discrete terms):
  • Short term vs long term economic growth: we saw that an increase in the aggregate demand curve increases a nation's output only temporally. However, if the aggregate supply changes due to new technology or to a change in the factors of production (excluding wages) then the LRAS would shift, leading to a sustainable long term economic growth.
    •  Note that when the aggregate demand hits the LRAS there is no long term economic growth assuming constant technology and capital levels. 
  • Sources of long term economic growth:
    • Human capital: anything that makes labor more productive. Here is a list of a few factors that creates growth for human capital: education, health, social life (see spillover effects). Anything that makes increases human capital will shift the aggregate supply to the right.
    • Physical capital: machines that makes the labor more productive (i.e computers, sewing machines, etc...). This is determined by the level of investment. Here is a list of factors that increases investment thereby increasing physical capital: low interest rates, new technology, and government regulation and taxes.
    • Technology: depends on the level of investment and human capital and as well as intellectual property rights, so that people are willing to spend time to work on an idea in order to get some financial return in the future.
    • Note that increase in technology, human capital, or physical capital will cause a shift in both the aggregate demand and aggregate supply, creating long term economic growth.
  • Growth policy: demand side policies are ineffective in for economic growth in the long run, since they only influence the aggregate demand. However, if a fiscal or monetary policy also have a supply side effect, then these policies can yield long term growth.
    • Government provision of goods/services such as defense, education, and roads. In general, policies that improve public infractures promote long term economic growth.
Reference: Welker, Jason. AP Maroeconomics Crash Course. Research & Education Association (2014). p 223-233.

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Location: Boston, MA, USA

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