66. Economic Growth Trends

• Growth in the U.S. Economy

• The growth of real GDP per person in the United States has fluctuated but has averaged 2 percent per year over the last century. The growth rate was 1.4 percent prior to the Great Depression and 2.1 percent after World War II

• Real GDP Growth in the World Economy

• Economic growth varies across countries. Among richest countries, there seems to be some convergence of real GDP per person but most other countries show less evidence of convergence. The “Asian Miracle” is the fast rate of convergence for Hong Kong, Singapore, Taiwan, Korea, and China.

67.The aggregate production function

• The aggregate production function is the relationship between real GDP and the quantity of labor employed when all other influences on production remain the same. The figure shows an aggregate production function.

The Labor Market, Labor Market Equilibrium and Potential GDP

The Demand for Labor

• The demand for labor is the relationship between the quantity of labor demanded and the real wage rate.

The Supply of Labor

• The supply of labor is the relationship between the quantity of labor supplied and the real wage rate

Labor Market Equilibrium and Potential GDP

• In the labor market, the real wage rate adjusts to equate the quantity of labor supplied to the quantity of labor demanded. In equilibrium, the labor market is at full employment. In the figure, the equilibrium quantity of employment is 200 billions of hours per year.

• Potential GDP is the level of production produced by the full employment quantity of labor. In combination with the production function shown in the previous figure, the labor market equilibrium in the figure of 200 billion hours per year means

• that potential GDP is $12 trillion.

69. Economic Growth Theories

1) Classical Growth Theory

Classical growth theory is the view that real GDP growth is temporary and that when real GDP per person rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level.

2) Neoclassical Growth Theory

Neoclassical growth theory is the proposition that the real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labor grow.

3) New Growth Theory

New growth theory holds that real GDP per person grows because of the choices people make in the pursuit of profit and that growth can persist indefinitely.

70. Employment and Unemployment, Three Labor Market Indicators

Three Labor Market Indicators

The unemployment rate is the percentage of the people in the labor force who are unemployed. It equals and Labor force = Number of people employed + Number of people unemployed. Between 1980 and 2010 the unemployment rate averaged 6.2 percent.

The employment-to-population ratio is the percentage of people of working age who have jobs. It equals In recent years the employment-to-population ratio has been about 62 percent. It fell during the recession and in June 2010 was 58.5 percent.

The labor force participation rate is the percentage of working-age population who are members of the labor force. It equals The labor force participation rate has been declining since it reached about 67 percent in 2000 and in June 2010 was 64.7 percent.