Understanding economic growth | AP Macroeconomics | Khan Academy

Summary

This video explores the concept of economic growth, distinguishing it from mere expansion of real GDP. It focuses on the increase in full employment output over time, which can happen independently of the economic cycle. The video uses the Production Possibilities Curve and the Aggregate Demand/Aggregate Supply model to explain how economic growth shifts these curves. Key factors driving growth include capital, human capital, technology, and improved institutions. By understanding these concepts, viewers can grasp how economies grow and the impact of various factors on long-term productivity.

Takeaways

• 😀 Economic growth, in this context, refers to an increase in full employment output over time, not just an increase in real GDP.
• 😀 Real GDP growth is called an expansion, not economic growth, if the full employment output remains the same.
• 😀 A **positive output gap** occurs when real GDP exceeds the full employment output, but that doesn't necessarily indicate economic growth.
• 😀 **Economic growth** happens when full employment output increases, and this can occur even during an economic contraction.
• 😀 A shift of the **production possibilities curve (PPC)** outward signifies economic growth, as it shows an increased capacity to produce goods and services.
• 😀 An economy operating behind the PPC indicates a **negative output gap**, but returning to the PPC is considered an expansion, not economic growth.
• 😀 Factors that can push the **PPC** outward include new technologies, more workers, additional resources, and better institutions.
• 😀 In the **aggregate demand and supply model**, economic growth is represented by a shift of the long-run aggregate supply curve to the right.
• 😀 Economic growth is influenced by factors such as increased capital, better education (human capital), technological advancements, and efficient institutions.
• 😀 Even during periods of contraction, economic growth can still occur if full employment output is increasing, as seen through the shift in the aggregate supply curve.

Q & A

What is the difference between economic growth and expansion in real GDP?

Economic growth refers to an increase in full employment output over time, independent of the economic cycle. Expansion refers to an increase in real GDP, which can occur during any phase of the economic cycle, but doesn't necessarily indicate economic growth.

What does full employment output represent?

Full employment output represents the level of output an economy can produce when operating at full potential, with no cyclical unemployment, and reflects the economy's capacity to produce goods and services sustainably.

Can real GDP increase without indicating economic growth? Explain.

Yes, real GDP can increase during an expansion, but if the full employment output does not increase, it does not qualify as economic growth. Economic growth happens only when full employment output increases.

How does a contraction in the economy relate to economic growth?

A contraction can still coincide with economic growth if full employment output increases. This is because economic growth is about the increase in full employment output, not necessarily the overall GDP level.

What is the production possibilities curve (PPC) and how does it relate to economic growth?

The PPC shows the trade-off between two goods or services at a point in time and the full employment output. Economic growth is shown by an outward shift of the PPC, indicating that the economy can now produce more at full employment.

What is the significance of a negative output gap in the context of economic growth?

A negative output gap occurs when the economy is underperforming. Over time, the economy can return to the PPC, which would indicate an expansion. However, economic growth occurs when the economy's capacity to produce (full employment output) increases, pushing the PPC outward.

How is economic growth represented in the aggregate demand and supply model?

In the aggregate demand and supply model, economic growth is represented by a rightward shift in the long-run aggregate supply (LRAS) curve, indicating that the economy has more resources or better technology to produce more at full employment.

What factors contribute to economic growth?

Economic growth can be driven by factors like capital (more resources and factories), human capital (better-educated, skilled workforce), technology (innovations in production methods), and efficient institutions (less bureaucratic delay, improved processes).

How does human capital affect economic growth?

Human capital, such as a better-educated or more skilled workforce, can enhance productivity, enabling the economy to produce more at full employment, thus contributing to economic growth.

Why is the distinction between real GDP growth and economic growth important?

The distinction is important because real GDP growth may not necessarily lead to economic growth if full employment output isn't increasing. Economic growth specifically refers to an increase in an economy's capacity to produce at full employment, independent of the business cycle.