Macroeconomics Data

e. Potential GDP – The quantity of real GDP produced increases as the quantity of labor increases. At the equilibrium quantity of labor, the economy is at full employment and the quantity of real GDP at full employment is potential GDP. So the full employment quantity of labor produces potential GDP.

III. What Makes Potential GDP Grow?

1. Growth of the supply of labor

2. Growth of labor productivity

a. Growth of the Supply of Labor: when the supply of labor grows, the supply of labor curve shifts rightward and the quantity of labor at a given real wage rate increases.

- Quantity of labor = number of workers employed × average hours per worker

- Number employed = employment-to-population ratio × working-age population

Quantity of labor changes as a result of changes in: average hours per worker, employment-to-population ratio, and the working-age population. The combined effect of average hours per worker decreasing and employment-to-population ratio increasing has kept the average hours per working-age population constant.

Effects of Population Growth: population growth brings growth in the supply of labor but doesn’t change the demand for labor or production function. The economy can produce more output by using more labor, but there’s no change in the quantity of real GDP that a given quantity of labor can produce. Diminishing returns are the source of the decrease in potential GDP per hour of labor.

• An increase in LS and no change in LD ( real wage rate falls and quantity of labor increases; potential GDP increases.

c. Growth of Labor Productivity: labor productivity is the quantity of real GDP produced by an hour of labor. Divide real GDP by aggregate labor hours to find labor productivity. When labor productivity grows, real GDP per person grows and raises the standard of living.

d. Effects of an Increase in Labor Productivity: If labor productivity increases, real GDP increases. Firms are willing to...