ECO 1302 Chapter Notes - Chapter 7: Capital Formation, Potential Output, Stabilization Policy

• School: University of Ottawa
• Department: Economics
• Course: ECO 1302
• Professor: Mario Seccareccia

Document Summary

Chapter 7: eco(cid:374)o(cid:373)ic growth theory a(cid:374)d policy. Growth policy: ensuring that the economy sustains a high long-run growth rate of potential gdp (although not necessarily the highest possible growth rate) Stabilization policy: keeping actual gdp reasonably close to potential gdp in the short run, so that society is plagued by neither high unemployment nor high inflation. More capital, improved workforce quality (normally measured by education and training), and better technology all raise labour productivity and therefore shift the production function upward. They constitute the three main pillars of growth. The growth rate of labour productivity depends on the rate of capital formation, the rate of improvement of workforce quality, and the rate of technical progress. So growth policy concentrates on speeding up these processes. Capital formation can be encouraged by low real interest rates, favourable tax treatment, rapid technical change, rapid growth of demand, and a climate of political stability that respects property rights.