6. CHANGES IN POTENTIAL GDP
When potential GDP changes, aggregate supply changes. An
increase in potential GDP increase both long-run aggregate
supply and short-run aggregate supply.
When potential GDP increases, both the LAS and SAS curves
shift rightward.
7. CHANGES IN POTENTIAL GDP
Figure 11.4 shows an
increase in potential
GDP increases both
long-run aggregate
supply and short-run
aggregate supply. The
long-run aggregate
supply curve shifts
rightward from LAS0
to LAS1 and the short-run
aggregate supply
curve shifts from
SAS0 to SAS1.
8. CHANGES IN POTENTIAL GDP
Potential GDP changes for any of three reasons:
1. The full-employment quantity of labor increases
2. The quantity of capital (physical or human) increases
3. Technology advances
9. CHANGES IN POTENTIAL GDP
1. The full-employment quantity of labor
increases:
The larger quantity of labor employed, the greater is
real GDP.
With constant capital and technology, potential GDP
increases only if the full-employment quantity of
labor increases.
Full employment occurs when the demand for labor
is equal to the supply of labor, i.e., when the labor
market is in equilibrium.
10. CHANGES IN POTENTIAL GDP
1. The full-employment quantity of labor
increases:
For example, A Pepsi bottling plant that employs
100 workers bottles more Pepsi than does an
otherwise identical plant that employs 10 workers.
12. CHANGES IN POTENTIAL GDP
2. The quantity of capital (physical or human)
increases:
Physical Capital
The accumulation of new capital increases capital per
worker and increases labor productivity.
Human Capital
Human capital acquired through education, on-the-job
training, and learning-by-doing is the most fundamental
source of labor productivity growth.
13. CHANGES IN POTENTIAL GDP
2. The quantity of capital (physical or human)
increases:
So the larger quantity of physical capital and human
capital, the greater is potential GDP.
For example, potential GDP per person in the
capital-rich USA is vastly greater than that in
capital-poor China and Russia.
15. CHANGES IN POTENTIAL GDP
3. Technological Advances
Technological change—the discovery and the application
of new technologies and new goods—has contributed
immensely to increasing labor productivity.
Technological advances are by far the most important
source of increased production over the past two
centuries.
As a result of technological advances, one farmer in the
United States today can feed 100 people and in a year one
autoworker can produce almost 14 cars and trucks.