Long-Run Growth: every key term you need (+ practice quiz)
33 flashcard terms for AP Macroeconomics Unit 5, written to match the course framework. Read them here, drill them as flashcards, or take the 16-question quiz. Free, no account needed.
Increase in real GDP over time. Growth rate: % change year-over-year. Long-run growth driven by productivity increase.
Sources of Growth
Capital accumulation (invest in factories), technological progress (innovations), labor growth (population), human capital (education, training).
Productivity
Output per unit input; key to growth. Higher productivity = same resources produce more. Tech drives productivity gains.
Capital-Labor Ratio
Capital per worker. Higher ratio → higher productivity. Diminishing returns: each additional capital less productive.
Diminishing Returns
As one input increases (fixed others), output increase slows. Fundamental economic principle.
Potential Output
Maximum sustainable output at full employment. Long-run growth increases potential output. Short-run fluctuations around potential.
Per Capita GDP
GDP per person = GDP / population. Better measure of living standards than total GDP. Growth accounts for population changes.
Developed vs Developing
Developed: high per capita, stable growth, services/tech. Developing: low per capita, rapid growth, agriculture/manufacturing.
Convergence Hypothesis
Poor countries grow faster than rich (catch-up growth); should eventually reach same per capita. Evidence mixed.
Unit 5 Summary
Growth driven by capital, technology, labor. Productivity key measure. Long-run growth increases potential output and living standards.
Intensive vs Extensive Growth
Extensive growth adds more inputs; intensive growth raises output per input. Only intensive growth reliably raises living standards over time.
Total Factor Productivity
The part of output growth not explained by added labor or capital. It reflects technology, institutions, and efficiency of resource use.
Human Capital
The accumulated skills, education, and health of workers. Investment in schooling and training raises labor productivity and shifts LRAS right.
Property Rights and Growth
Secure, enforceable ownership and contracts encourage investment and innovation because owners can capture the returns from long-lived projects.
Rule of Law and Institutions
Stable courts, low corruption, and predictable regulation reduce risk premiums, encouraging both domestic capital formation and foreign direct investment.
Investment in Infrastructure
Public capital such as roads, ports, power grids, and broadband lowers business costs economy-wide and raises the productivity of private capital.
Foreign Direct Investment
Purchase or construction of productive assets abroad. It brings capital and technology transfer, raising the host country's potential output.
Saving Rate and Growth
Higher national saving finances more investment at lower real interest rates, deepening the capital stock and raising the long-run growth path.
With diminishing returns to capital, adding capital alone eventually only offsets depreciation, so sustained growth per worker requires technological progress.
Depreciation
The wearing out of capital. Gross investment must exceed depreciation for the net capital stock, and hence potential output, to grow.
Supply-Side Fiscal Policy
Cuts to marginal tax rates, deregulation, and training subsidies aim to shift LRAS right by raising incentives to work, save, and invest.
Effects on the Phillips Curve of Growth
An increase in potential output lowers the natural rate of unemployment, shifting the long-run Phillips curve left.
Growth and the Price Level
A rightward LRAS shift with AD unchanged raises real output while lowering the price level, so growth is inherently disinflationary.
Real GDP per Capita and Growth Rates
Small differences compound: 1 percent versus 3 percent annual growth means doubling in 70 years instead of about 23.
Absolute vs Conditional Convergence
Absolute convergence predicts all poor countries catch up; conditional convergence says they converge only to their own steady state given saving rates and institutions.
Resource Curse
Abundant natural resources can slow growth by concentrating rents, encouraging corruption, and crowding out manufacturing and human capital investment.
Public Debt and Growth
Persistent deficits absorb saving and raise real interest rates, crowding out private investment and slowing capital accumulation over long horizons.
Balance of Payments
The record of all international transactions, split into the current account (goods, services, income, transfers) and the financial or capital account.
Current and Financial Account Offset
A current account deficit is financed by a financial account surplus, so foreigners acquire domestic assets. The two roughly sum to zero.
Appreciation and Depreciation
Appreciation makes exports pricier and imports cheaper, lowering net exports. Depreciation does the reverse.
Interest Rate Differential and Currency
Higher domestic real interest rates attract foreign financial capital, increasing demand for the domestic currency and causing it to appreciate.
Net Exports and the Exchange Rate Channel
Contractionary monetary policy raises rates, appreciates the currency, and reduces net exports, reinforcing the reduction in aggregate demand.
Trade Deficit Interpretation
A trade deficit is not automatically harmful. It means the country consumes more than it produces and is a net recipient of foreign capital inflows.