Economic Growth: Savings and Investments

The Very Long Run: Economic Growth Models

We can measure long run economic as the annual percentage change in per-capita real potential GDP.

Ecoonomic growth causes Y* to move to the right.

The standard of living is measured by the per capita real actual GDP: The average income generated by each individual within an economy

Although a small difference in growth rates may not seem to make a huge difference, compounded over time, smaller changes in growth rates can have a huge impact on economic growth!

-1% growth rate increases GDP by 10% in 10 years

-7% growth rate increases GDP by 100% in 10 years

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Putting it ALL together! Building and fiddling with aggregate expenditures!

 EQUILIBRIUM NATIONAL INCOME AND THE AGGREGATE EXPENDITURE FUNCTION:

REMEMEBER:

Consumption is a function of disposable income (income minus net taxes) and net taxes are taxes minus transfer payments.

So, when you add the government to the economy, you have to substitute (income minus net taxes) into the consumption equation!

As such, consumption is a function of income: C = f(Y) (the disposable part is now implicit with the addition of the government)

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