Unit VI

Long-Run Economics Growth, Phillips Curves, and the Laffer Curve

• Focus on Real GDP per Capita
• Last 50 years Real GDP grew by about 3.5% per year
• Last 50 Years Real GDP per Capita grew by about 2.3% per year

The Sources of Long-Run Growth

• Productivity- output per unit input
• Labor Productivity- output per worker

      What leads to higher productivity?

• Stock of Physical Capital- buildings, machines, robots, ect.
• Human Capital- Knowledge, skills, education, ect.
• Technology- technical means for producing goods and services
• Improved Resource Allocation- Trade allows us to shift labor services from low-productive jobs to high productive jobs
• Economies of Scale- reduction in per-unit cost that result from increases in the size of markets and firms

Production Possibilities Curve and LRAS
-Economic Growth= Shift in Production Possibilities Curve outward
-Economic Growth= Shift in the Long-Run Aggregate Supply Curve to the RIGHT

Why Growth Rate Differ among Countries
-Rates of Savings
-Foreign Investments
-Education
-Infrastructure- roads, power lines, ports, and information networks, ect.
-Research and Development
-Political Stability
-Protection of Property Rights
-Economic Freedom versus Excessive Government Intervention

The Phillips Curves- Short and Long Run
-Tradeoff between inflation and unemployment
-Stagflation leads to shifts in the SRPC
-Aggregate Supply Shocks: Oil Embargo, Major Agriculture shortfalls, Depreciating US Dollar, Wake Hikes, Inflationary Expectations
-Long-run Philips Curve (LRPC)
-Vertical line at the natural rate of Unemployment

Supply-side Economics and the Laffer Curve
-Stress that changes in Aggregate Supply are an active force in determining the levels of inflation, employment, and economic growth
-Concentrate on tax levels
-Lower taxes are an incentive for business to invest in our economy
-Lower taxes are an incentive for workers to work more and harder thereby becoming more productive
-Lower taxes are incentives for people to increase savings and therefore create lower interest rates for increases in business investment
-Focus on the marginal tax rates

The Laffer Curve

• Relationship between tax rates and tax revenues
• Used to support the supply-side argument
• Reaganomics= Supply-Side Economics
• Idea = the government could lower tax rates and actually increase tax revenues
• Has been severely criticized