5.7 Analyzing Supply Shocks

Upon completion of this chapter you should
realize that most of macroeconomics focuses on what keeps the economy operating at its potential output rather than on what causes potential output to grow rapidly;
know the main determinants of economic growth, as well as possible explanations for the recent slowdown and subsequent revival of productivity growth; and
understand the important role played by the nation's saving rate, and how it is affected by the government budget deficit.

6.1
The Determinants of Growth
The rate of growth of output varies dramatically over the business cycle. As we emerge from a recession, the economy can grow very quickly, at rates exceeding 5 or 6 percent per year, as unemployed labor and idle plant and equipment are put to work. "Economic growth" refers not to such short-run spurts in an economy's growth rate, but to growth in an economy's potential or full-employment output, measured over quite long periods of time. Economic growth depends on increases in the quantity and quality of the two basic inputs of the macroeconomic production process capital and labor and on improvements in the way in which they are combined. The following are the five main sources of GDP growth:
1. An increase in the size of the labor force. Examples of supply-side policies that affect the size of the labor force are immigration regulations, day-care subsidies, retirement benefits, and tax incentives.
2. An increase in the quality, of the labor force. Examples of supply-side policies that influence labor quality are subsidies for retraining programs and the development of technical schools oriented more closely to the needs of industry.
3. An increase in the size of the stock of physical capital. (Physical stock equals the number of buildings and the amount of equipment firms have to work with.) Examples of supply-side policies that affect the size of the capital stock are tax incentives for investment and saving.
4. An increase in the quality of the capital stock. Examples of supply-side policies that influence the quality of capital are tax incentives for research and development, and promotion of competition.
5. Improvements in the way in which capital and labor are combined to produce output. Improvements could be due to better worker/management relations, just-in-time inventory policies, greater division of labor (specialization), economies of scale, or the migration

 



Macroeconomic Essentials. Understanding Economics in the News 2000
Macroeconomic Essentials - 2nd Edition: Understanding Economics in the News
ISBN: 0262611503
EAN: 2147483647
Year: 2004
Pages: 152

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