AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/5/5-6)
Unit 5 · Topic 5.6
5.6 Economic Growth
Economic growth is a lasting rise in real GDP per person. It comes mainly from higher productivity, which rises with more physical capital and human capital per worker and better technology. You show growth as the PPC shifting outward or the LRAS curve shifting right.
Key terms
- economic growth
- real GDP per capita
- productivity
- physical capital
- human capital
- aggregate production function
Measuring growth
Economic growth means real GDP per capita (per person) rising over time. Real GDP is adjusted for inflation (2.6), and dividing by population shows output per person, which tracks living standards better than total output.
If real GDP grows 2% while the population grows 3%, real GDP per capita falls. The economy got bigger, but each person's share got smaller.
More workers raise total real GDP, but not necessarily real GDP per person. Output per person rises when productivity rises or when a larger share of the population works.
- Real GDP per capita = real GDP ÷ population.
- Growth rate (%) = (new value − old value) ÷ old value × 100.
Productivity and what drives it
Labor productivity is output per worker: real GDP ÷ the number of workers. Over long periods, rising productivity is the main source of rising living standards. It depends on three things:
- Physical capital per worker: tools, machines, buildings and infrastructure. A delivery driver with a van delivers more than one with a bicycle.
- Human capital per worker: the skills, education and health workers bring to the job. A trained electrician wires a house faster and more safely.
- Technology: better ways of combining inputs, from new software to higher-yield crops.
The aggregate production function
The aggregate production function links an economy's inputs to its output. Holding capital and technology constant, firms need more workers to produce more, so total employment and real GDP rise together.
On its graph, real GDP is on the vertical axis and employment is on the horizontal axis. The curve starts at the origin and rises, but it gets flatter: each added worker adds less output than the one before, because there's less capital per worker. More physical or human capital, or better technology, shifts the whole curve up, so the same number of workers produces more. Output per person rises with physical and human capital per person.
You won't have to draw this graph yourself on the free-response section, but multiple-choice questions may show it.
Showing growth on graphs
Growth shows up on two graphs, and both shifts mean the same thing: more potential output. On a PPC, the curve shifts outward, because the economy can now produce more of both goods (1.2). On an AD–AS graph, with the price level on the vertical axis and real GDP on the horizontal axis, LRAS shifts right from LRAS1 to LRAS2, and full-employment output rises.
Two things that aren't growth: moving from a point inside the PPC to a point on it uses idle resources more fully, like closing a recessionary gap. A rightward shift in AD raises real GDP in the short run without changing potential output.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Growth in real GDP per capita
Country M's real GDP rises from $600 billion to $630 billion in one year, while its population grows from 20 million to 20.4 million. Calculate real GDP per capita in each year and the growth rate of real GDP per capita.
Show the solutionHide the solution
- Step 1: Year 1: $600 billion ÷ 20 million = $30,000 per person.
- Step 2: Year 2: $630 billion ÷ 20.4 million ≈ $30,882 per person.
- Step 3: Growth rate = (30,882 − 30,000) ÷ 30,000 × 100 ≈ 2.94%.
- Step 4: Total real GDP grew 5%, but population grew 2%, so output per person grew by less than 5%.
Answer: About $30,000 and $30,882; real GDP per capita grew about 2.9%.
- Example 2
Which change causes growth?
Which of these would shift Country M's LRAS to the right? (a) A rise in consumer confidence. (b) A government program that trains workers in new skills. (c) The central bank lowering interest rates.
Show the solutionHide the solution
- Step 1: (a) Consumer confidence raises consumption, which shifts AD, not LRAS.
- Step 2: (b) Training raises human capital, so each worker produces more. Higher productivity raises potential output, so LRAS shifts right.
- Step 3: (c) Lower interest rates raise investment and consumption spending, which shifts AD in the short run. (Over many years, extra investment can add to the capital stock, but the immediate effect is on AD.)
Answer: (b) The training program.
- Example 3
Recovery isn't growth (classic trap)
An economy recovers from a recession, and real GDP rises 4% as unemployed workers go back to work. Has LRAS shifted?
Show the solutionHide the solution
- Step 1: During the recession, the economy was producing below full-employment output: to the left of LRAS, or inside the PPC.
- Step 2: Putting idle workers back to work moves the economy toward LRAS (onto the PPC). It doesn't increase what the economy could produce at full employment.
- Step 3: LRAS shifts only if the economy's capacity grows, through more capital, more human capital, better technology or more labor.
Answer: No. Real GDP rose toward the existing LRAS; potential output didn't change.
Common mistakes
- Showing long-run growth by shifting AD right. Growth shifts LRAS (and the PPC) outward; AD shifts are short-run changes.
- Using total real GDP when the question asks about living standards. Divide by population to get real GDP per capita.
- Calling a move from inside the PPC to the curve 'growth'. That's using idle resources; growth shifts the curve outward.
On the exam
- Free-response questions often end with a long-run part, such as what happens to the economy's long-run growth rate. Link the change to physical capital, human capital or technology, then to LRAS.
- You may be asked to calculate real GDP per capita or its growth rate from a small table. Show the division.
Connected topics
Videos
Check yourself
5 questions on 5.6 Economic Growth. Pick an answer to see if you got it, and why.
On an AD–AS graph with the price level on the vertical axis and real GDP on the horizontal axis, which of the following shows long-run economic growth?
Which of the following would most directly increase labor productivity?
| Year | Real GDP (billions of base-year dollars) | Population (millions) |
|---|---|---|
| 1 | 400 | 40 |
| 2 | 420 | 42 |
| 3 | 462 | 44 |
Hypothetical data
By what percent did Country G's real GDP per capita change from Year 1 to Year 2?
By what percent did Country G's real GDP per capita change from Year 2 to Year 3?
Which conclusion about Country G is best supported by the data?
0 of 5 answered