ECO 1304 Lecture Notes - Lecture 16: Rivet, Frictional Unemployment, Production Function
Document Summary
Macroeconomic policy strives to achieve rapid and reasonably stable growth while keeping both unemployment and inflation low. Only rising productivity can raise standards of living in the long run. And seemingly small differences in productivity growth rates can compound to enormous differences in living standards. The production function tells us how output the economy can produce from available supplies of labour and capital given the state of technology. Over long of time, the growth rates of actual and potential gdp match up quite well. But, owing o macroeconomic fluctuations, the two can diverge sharply over short periods. Economists generally assume that faster growth of potential gdp is socially beneficial. When gdp is below its potential, unemployment is above its full employment level. High employment exacts heavy financial and psychological costs from those who are its victims, costs that are borne quite unevenly by different groups in the population. Frictional unemployment: arises when people are between jobs for normal reasons.
