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he third quarter of 2010, for example, real GDP was $13,277.4 billion (annual rate). The U.S. population was 311.0 million. Real U.S. output per capita thus equaled $42,693. We use output per capita as a gauge of an economy’s material standard of living. If the economy’s population is growing, then output must rise as ...
r add less and less to total output, given constant quantities of other factors. Figure 23.6 The Aggregate Production Function An aggregate production function (PF) relates total output to total employment, assuming all other factors of production and technology are fixed. It shows that increases in employment lead to ...
ERROR: type should be string, got "https://socialsci.libretexts.org/@go/page/21741 Wikimedia Commons – public domain. Technological change and the capital investment that typically comes with it are often criticized because they replace labor with machines, reducing employment. Such changes, critics argue, hurt workers. Using the model of aggregate demand and aggregate supply, however, we arrive at a quite different conclusion. The model predicts that improved technology will increase the demand for labor and boost real wages. The period of industrialization, generally taken to be the time between the Civil War and World War I, was a good test of these competing ideas. Technological changes were dramatic as firms shifted toward mass production and automation. Capital investment soared. Immigration increased the supply of labor. What happened to workers? Employment more than doubled during this period, consistent with the prediction of our model. It is harder to predict, from a theoretical point of view, the consequences for real wages. The latter third of the 19th century was a period of massive immigration to the United States. Between 1865 and 1880, more than 5 million people came to the United States from abroad; most were of working age. The pace accelerated between 1880 and 1923, when more than 23 million people moved to the United States from other countries. Immigration increased the supply of labor, which should reduce the real wage. There were thus two competing forces at work: Technological change and capital investment tended to increase real wages, while immigration tended to reduce them by increasing the supply of labor. The evidence suggests that the forces of technological change and capital investment proved far more powerful than increases in labor supply. Real wages soared 60% between 1860 and 1890. They continued to increase after that. Real wages in manufacturing, for example, rose 37% from 1890 to 1914. Technological change and capital investment displace workers in some industries. But for the economy as a whole, they increase worker productivity, increase the demand for labor, and increase real wages. Sources: Wage data taken from Clarence D. Long, Wages and Earnings in the United States, 1860–1990 (Princeton, NJ: Princeton University Press, 1960), p. 109, and from Albert Rees, Wages in Manufacturing, 1890–1914 (Princeton, NJ: Princeton University Press, 1961), pp. 3–5. Immigration figures taken from Gary M. Walton and Hugh Rockoff, History of the American Economy, 6th ed. (New York: Harcourt Brace Jovanovich, 1990), p. 371. 8.2.5 https://socialsci.libretexts.org/@go/page/21741 Answer to Try It! Problem The production function in Panel (b) shifts up to PF . Because it reflects greater productivity of labor, firms will increase their demand for labor, and the demand curve for labor shifts to D in Panel (a). LRAS shifts to LRAS in Panel (c). Employment and potential output rise. Potential output will be greater than $2,200 billion. 1 2 2 2 Figure 23.11 This page titled 8.2: Growth and the Long-Run Aggregate Supply Curve is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Anonymous. 23.2: Growth and the Long-Run Aggregate Supply Curve by Anonymous is licensed CC BY-NC-SA 3.0. Original source: https://2012books.lardbucket.org/books/economics-principles-v2.0/. 8.2.6 https://socialsci.libretexts.org/@go/page/21741 8.3: Determinants of Economic Growth  Learning Objective 1. Discuss the sources of economic growth. 2. Discuss possible reasons why countries grow at different rates. In this section, we review the main determinants of economic growth. We also examine the reasons for the widening disparities in economic growth rates among countries in recent years. The Sources of Economic Growth As we have learned, there are two ways to model economic growth: (1) as an outward shift in an economy’s production possibilities curve, and (2) as a shift to the right in its long-run aggregate supply curve. In drawing either one at a point in time, we assume that the economy’s factors of production and its technology are unchanged. Changing these will shift both curves. Therefore, anything that increases the quantity or quality of factors of production or that improves the technology available to the economy contributes to economic growth. The sources of growth for the U.S. economy in the 20th century were presented in the chapter on sources of production. There we learned that the main sources of growth for the United States from 1948 to 2002 were divided between increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and technology (about 40%). Since 1995, however, improvements in factor quality and technology have been the main drivers of economic growth in the United States. In order to devote resources to increasing physical and human capital and to improving technology—activities that will enhance future production—society must forgo using them now to produce consumer goods. Even though the people in the economy would enjoy a higher standard of living today without this sacrifice, they are willing to reduce present consumption in order to have more goods and services available for the future. As a college student, you personally made such a choice. You decided to devote time to study that you could have spent earning income. With the higher income, you could enjoy greater consumption today. You made this choice because you expect to earn higher income in the future and thus to enjoy greater consumption in the future. Because many other people in the society also choose to acquire more education, society allocates resources to produce education. The education produced today will enhance the society’s human capital and thus its economic growth. All other things equal, higher saving allows more resources to be devoted to increases in physical and human capital and technological improvement. In other words, saving, which is income not spent on consumption, promotes economic growth by making available resources that can be channeled into growth-enhancing uses. Explaining Recent Disparities in Growth Rates Toward the end of the 20th century, it appeared that some of the world’s more affluent countries were growing robustly while others were growing more slowly or even stagnating. This observation was confirmed in a major study by the Organization for Economic Co-operation and Development (OECD) , whose members are listed in Table 23.1 “Growing Disparities in Rates of Economic Growth”. The table shows that for the OECD countries as a whole, economic growth per capita fell from an average of 2.2% per year in the 1980s to an average of 1.9% per year in the 1990s. The higher standard deviation in the latter period confirms an increased disparity of growth rates in the more recent period. Moreover, the data on individual countries show that per capita growth in some countries (specifically, the United States, Canada, Ireland, Netherlands, Norway, and Spain) picked up, especially in the latter half of the 1990s, while it decelerated in most of the countries of continental Europe and Japan. 1 Table 23.1 Growing Disparities in Rates of Economic Growth Trend Growth of GDP per Capita Country United States Japan 1980–1990 1990–2000 1996–2000 2.1 3.3 2.3 1.4 2.8 0.9 8.3.1 https://socialsci.libretexts.org/@go/page/21742 Trend Growth of GDP per Capita Country Germany France Italy United Kingdom Canada Austria Belgium Denmark Finland Greece Iceland Ireland Luxembourg Netherlands Portugal Spain Sweden Switzerland Turkey Australia New Zealand Mexico Korea Hungary Poland Czech Republic 2 OECD24 1.9 1.6 2.3 2.2 1.4 2.1 2.0 1.9 2.2 0.5 1.7 3.0 4.0 1.6 3.1 2.3 1.7 1.4 2.1 1.6 1.4 0.0 7.2 — — — 2.2 1980–1990 1990–2000 1996–2000 1.2 1.5 1.5 2.1 1.7 1.9 1.9 1.9 2.1 1.8 1.5 6.4 4.5 2.4 2.8 2.7 1.5 0.4 2.1 2.4 1.2 1.6 5.1 2.3 4.2 1.7 1.9 1.7 1.9 1.7 2.3 2.6 2.3 2.3 2.3 3.9 2.7 2.6 7.9 4.6 2.7 2.7 3.2 2.6 1.1 1.9 2.8 1.8 2.7 4.2 3.5 4.8 1.4 2.2 Standard Deviation of OECD24 0.74 1.17 1.37 Variation in the growth in real GDP per capita has widened among the world’s leading industrialized economies. Source: Excerpted from Table 1.1 Organization for Economic Co-operation and Development, Sources of Economic Growth in OECD Countries, 2003: p. 32–33. The study goes on to try to explain the reasons for the divergent growth trends. The main findings were: In general, countries with accelerating per capita growth rates also experienced significant increases in employment, while those with stagnant or declining employment generally experienced reductions in per capita growth rates. Enhancements in human capital contributed to labor productivity and economic growth, but in slower growing countries such improvements were not enough to offset the impact of reduced or stagnant labor utilization. Information and communication technology has contributed to economic growth both through rapid technological progress within the information and communication technology industry itself as well as, more recently, through the use of information 8.3.2 https://socialsci.libretexts.org/@go/page/21742 and communication technology equipment in other industries. This has made an important contribution to growth in several of the faster growing countries. Other factors associated with more growth include: investments in physical and human capital, sound macroeconomic policies (especially low inflation), private sector research and development, trade exposure, and better developed financial markets. Results concerning the impact of the size of the government and of public sector research and development on growth were more difficult to interpret. With qualifications, the study found that strict regulation of product markets (for example, regulations that reduce competition) and strict employment protection legislation (for example, laws that make hiring and firing of workers more d"
ifficult) had negative effects on growth. All countries show a large number of firms entering and exiting markets. But, a key difference between the United States and Europe is that new firms in the United States start out smaller and less productive than those of Europe but grow faster when they are successful. The re...
th. 7. Suppose a series of terrorist attacks destroys half the capital in the United States but does not affect the population. What will happen to potential output and to the real wage? 8. “Given the rate at which scientists are making new discoveries, we will soon reach the point that no further discoveries can be ma...
holds value over time. Consider a $20 bill that you accidentally left in a coat pocket a year ago. When you find it, you will be pleased. That is because you know the bill still has 9.1.1 https://socialsci.libretexts.org/@go/page/21745 value. Value has, in effect, been “stored” in that little piece of paper. Money, of...
ney. A credit card identifies you as a person who has a special arrangement with the card issuer in which the issuer will lend you money and transfer the proceeds to another party whenever you want. Thus, if you present a MasterCard to a jeweler as payment for a $500 ring, the firm that issued you the card will lend yo...
ial purchases of securities whose value was ultimately based on those mortgage loans themselves began failing. Bear Stearns, one of the largest investment banks in the United States, required federal funds to remain solvent. Another large investment bank, Lehman Brothers, failed. In an effort to avoid a similar fate, s...
ill end up at some other bank, which will then have excess reserves—and create still more money. And that process will just keep going as long as there are excess reserves to pass through the banking system in the form of loans. How much will ultimately be created by the system as a whole? With a 10% reserve requiremen...
me. How large would the contraction be?  Case in Point: A Big Bank Goes Under Figure 24.9 Wikimedia Commons – CC BY-SA 3.0. It was the darling of Wall Street—it showed rapid growth and made big profits. Washington Mutual, a savings and loan based in the state of Washington, was a relatively small institution whose CEO...
t rate charged for such loans; it is determined by banks’ demand for and supply of these reserves. The ability to set the discount rate is no longer an important tool of Federal Reserve policy. To deal with the recent financial and economic conditions, the Fed greatly expanded its lending beyond its traditional discoun...
on, though, is increasing liquidity that will hopefully stimulate private spending. For example, these credit facilities may encourage banks to pare down their excess reserves (which grew enormously as the financial crisis unfolded and the economy deteriorated) and to make more loans. In the words of Fed Chairman Ben B...
faces a 20% reserve requirement. The customer writes the same check. How will this affect your answers? 8. Now consider an economy in which the central bank has just purchased $8 billion worth of government bonds from banks in the economy. What would be the effect of this purchase on the money supply in the country, a...
nel (c), an increase in the supply of bonds pushes bond prices down. Interest rates rise. The quantity of investment is likely to fall, shifting aggregate demand to the left, from AD to AD in Panel (d). Output and the price level fall from Y to Y and from P to P , respectively. Assuming other determinants of aggregate ...
decreases. Show and explain the effects on the bond and foreign exchange markets. Use the aggregate demand/aggregate supply framework to show and explain the effects on investment, net exports, real GDP, and the price level. 10.1.5 https://socialsci.libretexts.org/@go/page/21750  Case in Point: Betting on a Plunge Fig...
its funds. Consider an alternative money management approach that permits the same pattern of spending. At the beginning of the month, the household deposits $1,000 in its checking account and the other $2,000 in a bond fund. Assume the bond fund pays 1% interest per month, or an annual interest rate of 12.7%. After 1...
ney demand. Preferences Preferences also play a role in determining the demand for money. Some people place a high value on having a considerable amount of money on hand. For others, this may not be important. Household attitudes toward risk are another aspect of preferences that affect money demand. As we have seen, b...
cal line. Money market equilibrium occurs at the interest rate at which the quantity of money demanded equals the quantity of money supplied. All other things unchanged, a shift in money demand or supply will lead to a change in the equilibrium interest rate and therefore to changes in the level of real GDP and the pri...
by the Fed that interest rates will rise sharply in the next quarter 3. A wave of muggings 4. An announcement of an agreement between Congress and the president that, beginning in the next fiscal year, government spending will be reduced by an amount sufficient to eliminate all future borrowing 8. Some low-income coun...
llow any particular path. Furthermore, the legislation does not suggest what should be done if the goals of achieving 11.1.1 https://socialsci.libretexts.org/@go/page/21754 full employment and maximum purchasing power conflict. The Full Employment and Balanced Growth Act of 1978 The clearest, and most specific, stateme...
In Panel (a), this is shown as a shift to AD , and the recessionary gap is closed. b 2 2 2 2 11.1.3 https://socialsci.libretexts.org/@go/page/21754 Figure 26.1 Expansionary Monetary Policy to Close a Recessionary Gap In Panel (a), the economy has a recessionary gap Y − Y . 1 An expansionary monetary policy could seek t...
uct of monetary policy. The two policy-making bodies, the Board of Governors and the Federal Open Market Committee (FOMC), are small and largely independent from other political institutions. These bodies can thus reach decisions quickly and implement them immediately. Their relative independence from the political pro...
such a policy, of course, is that the Fed would be responding to past economic conditions with policies that are not likely to affect the economy for a year or more. Another difficulty is that inflation could be rising when the economy is experiencing a recessionary gap. An example of this, mentioned earlier, occurred ...
xtension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity. The specific new credit facilities that the Fed has created were discussed in the Case in Point in the chapter on the nature and creation of money. In general, the Fed is hoping that these new c...
s after the recession began. 2. The impact lag: investment did not pick up quickly after interest rates were reduced. Alternatively, it could be attributed to the expansionary monetary policy’s not having its desired effect, at least initially, on investment. 11.2.7 https://socialsci.libretexts.org/@go/page/21755 1 See...
n the long run underlies the close relationship we have seen between changes in the money supply and changes in the price level. But velocity is not stable in the short run; it varies significantly from one period to the next. Figure 26.9 shows annual values of the velocity of M2 from 1970 through 2009. Velocity is qui...
seek particular goals. That leaves the Fed free to set its own goals. In recent years, its primary goal has seemed to be the maintenance of an inflation rate below 2% to 3%. Given success in meeting that goal, the Fed has used its tools to stimulate the economy to close recessionary gaps. Once the Fed has made a choice...
rew by about 20% a year over the long run had an annual inflation rate of about 20% and that a country whose money supply grew by about 50% a year had an annual inflation rate of about 50%. Explain this finding in terms of the equation of exchange. 1 Speech by Alan Greenspan before the Board of Directors of the Nationa...
cted to be even larger during the administration of Barack Obama. 12.1.3 https://socialsci.libretexts.org/@go/page/21759 The National Debt The national debt is the sum of all past federal deficits, minus any surpluses. Figure 27.6 shows the national debt as a percentage of GDP. It suggests that, relative to the level o...
o changes in consumption, automatic stabilizers act swiftly to reduce the degree of changes in real GDP. It is important to note that changes in expenditures and taxes that occur through automatic stabilizers do not shift the aggregate demand curve. Because they are automatic, their operation is already incorporated in...
paigned on a platform of increased defense spending and a sharp cut in income taxes. The tax cuts are approved in 1981 and are implemented over a period of three years. The increased defense spending begins in 1981. While the Reagan administration rejects the use of fiscal policy as a stabilization tool, its policies t...
he nature of bureaucracy itself. The CBO estimate that only a portion of the spending for the stimulus plan passed in 2009 will be spent in the next two years is an example of the implementation lag. Government spending requires bureaucratic approval of that spending. For example, a portion of the stimulus plan must go...
scal policy as a stabilization tool? 1. Better and more speedily available data on the state of the economy 2. A finding that private sector investment spending is not much affected by interest rate changes 3. A finding that the supply-side effects of a tax cut are substantial  Case in Point: Crowding Out in Canada Fi...
y to be smaller than the shift in the aggregate demand curve. 7. Suppose a country decreases government purchases by $100 billion. Suppose the multiplier is 1.5 and the economy’s real GDP is $5,000 billion. 1. In which direction will the aggregate demand curve shift and by how much? 2. Explain using a graph why the cha...
iables. The consumption function is plotted in the upper part of the graph. At points along the 45-degree line, the values on the two axes are equal; we can measure personal saving as the distance between the 45-degree line and consumption. The curve of the saving function is in the lower portion of the graph. At a dis...
consumption function, which can be presented in a table, in a graph, or in an equation. Personal saving is disposable personal income not spent on consumption. The marginal propensity to consume is MPC = ΔC/ΔY and the marginal propensity to save is MPS = ΔS/ΔY . The sum of the MPC and MPS is 1. The current income hypot...
xpected. In this case, inventories will fall below what firms expected, in which case, unplanned investment would be negative. Investment during a period equals the sum of planned investment (I ) and unplanned investment (I ). P U Equation 28.6 We shall find that planned and unplanned investment play key roles in the a...
xpenditures would be $5,400 billion. Consumers and firms would demand more than was produced; firms would respond by reducing their inventories below the planned level (that is, there would be an unplanned decrease in inventories) and increasing their output in subsequent periods, again moving the economy toward its eq...
e four points still hold as we add the two other components of aggregate expenditures—government purchases and net exports —and recognize that government not only spends but also collects taxes. We look first at the effect of adding taxes to the aggregate expenditures model and then at the effect of adding government p...
the direct increment of consumption spending. Mr. Heller also predicted that proposed cuts in corporate income tax rates would increase investment by about $6 billion. The total change in autonomous aggregate expenditures would thus be $15 billion: $9 billion in consumption and $6 billion in investment. He predicted t...
Figure 28.16, as is the aggregate demand curve. Now suppose a $1,000-billion increase in net exports shifts each of the aggregate expenditures curves up; AE . The aggregate demand curve thus shifts to the right by $2,000 billion, the change in aggregate expenditures times the multiplier, assumed to be 2 in this example...
and are trying to persuade the members of the House Appropriations Committee to purchase $100 billion worth of new materials, in part to stimulate the economy. Explain to the members how the multiplier process will work. Numerical Problems 1. Suppose the following information describes a simple economy. Figures are in ...
uals zero. If there is no change in the labor force, in natural resources, or in technology, the production possibilities curve will remain fixed at PPC . 1 A A A 1 Figure 29.4 The Choice between Consumption and Investment A society with production possibilities curve PPC could choose to produce at point A, producing C...
ust remember that investment is an addition to capital, and that capital is something that has been produced in order to produce other goods and services. A bond is not capital. The purchase of a bond is not an investment. We can thus think of purchasing bonds as a financial investment—that is, as an alternative to inv...
sidizes state and local government production of transportation, education, and many other facilities to encourage greater investment in public sector capital. For example, the federal government pays 90% of the cost of investment by local government in new buses for public transportation. Key Takeaways The quantity of...
of investment spending in Australia on new buildings, plant, and equipment was 17% higher in 2005 than in 2004. Within the investment category, mining investment, spurred on by high prices for natural resources, was particularly strong. Source: Scott Murdoch, “Equipment Investment Gives Boost to Economy,” Courier Mail...
market for that country’s goods and services. Because foreign demand for U.S. exports is almost as large as investment and government purchases as a component of aggregate demand, it can be very important in terms of growth. The increase in exports from 2000 to 2007, for example, accounted for almost 20% of the gain i...
rate should thus tend to reduce net exports. A reduction in the exchange rate should increase net exports. Trade Policies A country’s exports depend on its own trade policies as well as the trade policies of other countries. A country may be able to increase its exports by providing some form of government assistance (...
nt account balance will always be the negative of the capital account balance. 3. Summarize the economic arguments per se against public opposition to a current account deficit and a capital account surplus. There is an important difference between trade that flows, say, from one city to another and trade that flows fr...
eased the U.S. surplus on capital account. To buy those assets, foreign purchasers had to purchase dollars. Also, U.S. citizens became less willing to hold foreign assets, and their preference for holding U.S. assets increased. United States citizens were thus less willing to supply dollars to the foreign exchange mark...
contained and markets remain sufficiently flexible, changing terms of trade, interest rates, asset prices, and exchange rates will cause U.S. saving to rise, reducing the need for foreign finance, and reversing the trend of the past decade toward increasing reliance on it. If, however, the pernicious drift toward fisc...
s implied by their commodity values because of the costs involved in exchanging currencies for gold, but these variations are slight. Under the gold standard, the quantity of money was regulated by the quantity of gold in a country. If, for example, the United States guaranteed to exchange dollars for gold at the rate ...
n a central bank sells bonds, the money supply falls. When it sells foreign currency, the result is no different. Sales of foreign currency by Thailand’s central bank in order to purchase the baht thus reduced Thailand’s money supply and reduced the bank’s holdings of foreign currencies. As currency traders began to su...
? 5. Suppose a nation has a surplus on capital account. What does this mean? What can you conclude about its balance on current account? 6. The following analysis appeared in a newspaper editorial: “If foreigners own our businesses and land, that’s one thing, but when they own billions in U.S. bonds, that’s another. We...
-off the Phillips curve implied did, in fact, exist in the United States. Figure 31.2 shows annual rates of inflation (computed using the implicit price deflator) plotted against annual rates of unemployment from 1961 to 1969. The points appear to follow a path quite similar to a Phillips curve relationship. The civili...
, the highest rate since 1951. Mr. Nixon cut government purchases in 1969, and the Fed produced a sharp slowing in money growth. The president’s economic advisers predicted at the beginning of 1970 that inflation and unemployment would both fall. Appraising the 1970 debacle early in 1971, the president’s economists sai...
and an increase in the price level. The Recovery Phase The stagflation phase shown in Figure 31.9 leaves the economy with a recessionary gap at point 4 in Panel (a). The economy is bumped into a recession by changing expectations. Policy makers can be expected to respond to the recessionary gap by boosting aggregate de...
lues of inflation and the unemployment rate in the long run. We shall see that the rates of money growth and of economic growth determine the inflation rate. Unemployment that persists in the long run includes frictional and structural unemployment. We shall examine some of the forces that affect both types of unemploy...
draw a reservation wage curve (Figure 31.15), that suggests a negative relationship between the reservation wage and the duration of a person’s job search. Similarly, as a job search continues, the worker will accumulate better offers. The “best-offer-received” curve shows what its name implies; it is the best offer t...
workers seeking jobs.  Case in Point: Altering the Incentives for Unemployment Insurance Claimants Figure 31.17 Tax Credits – Unemployment – CC BY 2.0. While the rationale for unemployment insurance is clear—to help people weather bouts of unemployment—especially during economic downturns, designing programs that red...
or Economists (JOE). Virtually all academic and many nonacademic positions for which applicants are being sought for economics positions are listed in the newsletter, which is quite inexpensive. How do you think that the publication of this journal affects the unemployment rate among economists? What type of unemployme...
f the investment component of aggregate demand; it was very much in evidence in the first years of the Great Depression. Other factors contributed to the sharp reduction in aggregate demand. The stock market crash reduced the wealth of a small fraction of the population (just 5% of Americans owned stock at that time), ...
ts are generally lumped together as adherents to the classical school, but their views were anything but uniform. Many developed an analytical framework that was quite similar to the essential elements of new Keynesian economists today. Economist Thomas Humphrey, at the Federal Reserve Bank of Richmond, marvels at the ...
time policy makers were no longer forcing increases in aggregate demand to keep it there. The adjustment in short-run aggregate supply brought the economy back to its potential output. 17.2.2 https://socialsci.libretexts.org/@go/page/21785 Figure 32.7 The Economy Closes an Inflationary Gap The Nixon administration and ...
ch this level of output quickly. But the similarity ends there. Classical economics emerged in large part before economists had developed sophisticated mathematical models of maximizing behavior. The new classical economics puts mathematics to work in an extremely complex way to generalize from individual behavior to a...
e years to get even a mildly contractionary tax increase put into place, and the Fed acted to counter the impact of this measure by shifting to an expansionary policy. The second half of the 1960s was marked, in short, by persistent efforts to boost aggregate demand, efforts that kept the economy in an inflationary gap...
ts continued to rise, they began to dominate discussions of fiscal policy. In 1990, with the economy slipping into a recession, President George H. W. Bush agreed to a tax increase despite an earlier promise not to do so. President Bill Clinton, whose 1992 election resulted largely from the recession of 1990–1991, intr...
w Keynesian economists have incorporated major elements of the ideas of the monetarist and new classical schools into their formulation of macroeconomic theory. Try It! Show the effect of an expansionary monetary policy on real GDP 1. according to new Keynesian economics 2. according to the rational expectations hypoth...
changes in fiscal and monetary policy can affect aggregate demand; and that in the long run, the economy moves to its potential level of output. The events of the 1980s and beyond raised serious challenges for the monetarist and new classical schools. New Keynesian economists formulated revisions in their theories, in...
shares of income received by each of the first four quintiles fell, while the share received by the top 20% rose sharply. The Lorenz curve for 2006 was more bowed out than was the curve for 1968. (Mean income adjusted for inflation and reported in 2006 dollars; percentages do not sum to 100% due to rounding.) Sources: ...
l in the United States during the past 36 years. The degree of mobility up and down the distribution of income appears to have declined in recent years. 18.1.4 https://socialsci.libretexts.org/@go/page/21789 Among the factors explaining increased inequality have been changes in family structure and changes in the deman...
s methodology for defining poverty. No attempt is made to establish an income at which a household could purchase basic necessities. Indeed, no attempt is made in the definition to establish what such necessities might be. The day has long passed when the average household devoted one-third of its income to food purcha...
der greater pressure, many states have tightened standards. Cash Versus Noncash Assistance Aid provided to people falls into two broad categories: cash and noncash assistance. Cash assistance is a money payment that a recipient can spend as he or she wishes. Noncash assistance is the provision of specific goods and ser...
, R. M., 2002). Evaluation of the effect of the federal welfare reform program on work participation, particularly over the long term, and on poverty continues. 2 Key Takeaways Poverty may be defined according to a relative or an absolute definition. Official estimates of the number of people who are “poor” are typical...
s productive than an otherwise similar white worker. Now employers have a lower demand, D , for black than for white workers. Employers pay black workers a lower wage, W , and employ fewer of them, L instead of L, than they would in the absence of discrimination. B B B Sources of Discrimination As illustrated in Figure...
ange due to competitive forces and changes in the legal environment, discrimination against various groups will decrease. However, it may be a long time before discrimination disappears from the labor market, not only due to remaining discriminatory preferences but also because the human capital and work characteristic...
eople with blue eyes be affected? 10. The Case in Point on Income Inequality in the United States versus continental Western Europe argues that people get, in effect, what they expect. People in the United States attribute success to hard work and skill, while people in Continental Western Europe attribute success to c...
etter approach to comparing incomes converts currencies to dollars on the basis of purchasing power. This measure is reported in what are called international dollars. An international dollar has the same purchasing power as does a U.S. dollar in the United States. This is reported in the column labeled “2007 Internati...
and it must increase relative to population growth. And because inequality is so serious a problem in low-income nations, development must deliver widespread improvement in living conditions. It therefore seems useful to define economic development as a process that produces sustained and widely shared gains in per cap...
e Nature and Challenge of Economic Development by Anonymous is licensed CC BY-NC-SA 3.0. Original source: https://2012books.lardbucket.org/books/economics-principles-v2.0/. 19.1.8 https://socialsci.libretexts.org/@go/page/21794 19.2: Population Growth and Economic Development  Learning Objective 1. Explain the relatio...
wth early in the development process. Demographers have identified a process of demographic transitionSituation in which population growth rises with a fall in death rates and then falls with a reduction in birth rates. in which population growth rises with a fall in death rates and then falls with a reduction in birth...
-based approach to economic growth. We should not conclude, however, that growth has been independent of any public sector activity. China, for example, remains a nominally socialist state; its government continues to play a major role. The governments of South Korea, Taiwan, and Singapore all targeted specific sectors...
s on their debt when required payments exceeded net exports. Much foreign debt was simply written off as bad debt by lending institutions. While foreign debts created a major crisis in the 1980s, subsequent growth appeared to make these payments more manageable. A somewhat different international financial crisis emerg...
o does more political freedom. Just as pessimism that economic growth has a negative impact on the poor is dissipating, likewise the notion that developing countries must wait until they are developed in order for their citizens to experience political freedom is also falling by the wayside. Sources: Jagdish Bhagwati, ...
ts were determined by the amount of labor used to produce the capital, so the price of a good equaled a return to labor plus profit. Marx defined profit as surplus value, the difference between the price of a good or service and the labor cost of producing it. Marx insisted that surplus value was unjustified and repres...
lled feudalism to the ground are now turned against the bourgeoisie itself. … Masses of laborers, crowded into the factory, are organized like soldiers. … It was just this contact that was needed to centralize the numerous local struggles, all of the same character, into one national struggle between classes.” The nati...
s such as the United States and establishing a unique form of socialism that made greater use of markets than the Soviet-style systems did. Most important, however, Tito quickly moved away from the centralized management style of the Soviet Union to a decentralized system in which workers exercised considerable autonom...
ividual banks. Banks did not have an opportunity to assess the profitability of individual enterprises; such considerations were irrelevant in the old command socialist systems. Bankers in these economies were thus unaccustomed to the roles that would be required of them in a market capitalist system. 20.3.1 https://so...
n continued expansion of the free economy and a relative shrinking of the state-run sector. Given the rapid progress China has achieved with its gradual approach to reform, it is hard to imagine that the country would reverse course. Given the course it is on, China seems likely to become a market capitalist economy—an...
ng a demand and supply diagram. On your diagram, show the old price, the new price, and the black market price.  Case in Point: Eastern Germany’s Surprisingly Difficult Transition Experience Figure 34.7 Gavin Stewart – The fall of the Berlin Wall – CC BY 2.0. The transition of eastern Germany was supposed to be the ea...
game in the 1998–1999 basketball season would always reduce Shaquille O’Neal’s earnings by $210,000. The slopes of the curves describing the relationships we have been discussing were constant; the relationships were linear. Many relationships in economics are nonlinear. A nonlinear relationship between two variables i...
tps://socialsci.libretexts.org/@go/page/21804 Thus far our work has focused on graphs that show a relationship between variables. We turn finally to an examination of graphs and charts that show values of one or more variables, either over a period of time or at a single point in time. Key Takeaways The slope of a nonl...
of false cause. 21.2.3 https://socialsci.libretexts.org/@go/page/21805 Notice that Figure 21.16 has two vertical axes. The left-hand axis shows values of temperature; the right-hand axis shows values for the Dow Jones Industrial Average. Two axes are used here because the two variables, San Juan temperature and the Do...
engers taking the bus on a particular day and the club’s revenue from that trip. We begin our graph in Panel (a) of Figure 21.2 by drawing two axes to form a right angle. Each axis will represent a variable. The axes should be carefully labeled to reflect what is being measured on each axis. It is customary to place th...
lled an inverse relationship. The slope of a curve describing a negative relationship is always negative. A curve with a negative slope is always downward sloping. As an example of a graph of a negative relationship, let us look at the impact of the cancellation of games by the National Basketball Association during th...
breaks in both the vertical and horizontal axes of the grid. Draw a line through the points you have plotted. Does your graph suggest a positive or a negative relationship? What is the slope between A and B? Between B and C? Between A and C? Is the relationship linear? 21.3.8 https://socialsci.libretexts.org/@go/page/2...
s model by $500 billion. In Panel (b), the aggregate demand curve thus shifts to the right by $500 billion to AD . The equilibrium level of real GDP rises to $7,300 billion, while the price level rises to P . 2 2 2 1 The aggregate expenditures model, of course, assumes a constant price level. To get a more complete pic...
en planned spending and output. aggregate production function | A combination of an economy’s physical capital stock, labor hours, human capital, knowledge, natural resources, and social infrastructure that produces output (real GDP). capital stock | The total amount of physical capital in an economy. consumption funct...
that wears out each year. depreciation rate | The fraction of the capital stock that wears out each year. devaluation | A decrease in the value of a currency in a fixed exchange rate. devaluation | A decrease in the value of a currency in a fixed exchange rate. diminishing marginal product | The more an input is being ...
vidual supplies at different values of the real wage. inflation rate | The growth rate of the price index from one year to the next. inflation rate | The growth rate of the price index from one year to the next. inflation rate | The growth rate of the price index from one year to the next. inflation rate | The growth r...