ECO 1302 Chapter Notes - Chapter 6: Gross Domestic Product, Frictional Unemployment, Potential Output
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 much output the economy can produce from the available supplies of labour and capital, given the state of technology. E(cid:272)o(cid:374)o(cid:373)ists i(cid:374)(cid:448)e(cid:374)ted the (cid:272)o(cid:374)(cid:272)ept of pote(cid:374)tial gdp to (cid:373)easure the e(cid:272)o(cid:374)o(cid:373)y"s (cid:374)or(cid:373)al (cid:272)apa(cid:272)ity to produce goods and services. Specifically, potential gdp is the real gross domestic product (gdp) an economy could produce if its labour force were fully employed. The growth rate of potential gdp is the sum of the growth rate of the labour force plus the growth rate of labour productivity. The latter depends on, among other things, technological change and investments in new capital.