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“We ve been looking at real and nominal gdp and so once more let s s define gdp as the total value of all final goods and services produced in economy in a year. We ve looked at real gdp. Which is in base year prices. So that we can compare one year to the next and we can see how much more we are producing as opposed to just seeing a price change.
Nominal gdp was that total value of all final goods and services produced an economy in a year. But it was in the current market prices and so if we simply looked at a change in nominal gdp from one year to the next. We couldn t tell whether that was because of a change in price or because we were making more stuff. And that s what we looked at at the previous level in this level.
We want to look at that gdp in terms of what we are making and we want to look at how do you increase that gdp. We re looking another term besides nominal and real gdp. And that is potential gdp. So.
Potential gdp is the total value of all the goods and services produce an economy in a year. If you used all of your resources. So potential gdp is how big the economy could be if we used all of our labor. If we use all of our land.
We use all of our capital. This is how big our economy could be now we can represent potential gdp in dollar form. Just like we did real and nominal gdp and we re gonna do that in later levels. But right now as we look at potential gdp.
Let s look at it in terms of the goods that we douce so here on this graph this is a graph called a production..
Possibility frontier. It shows the combination of two goods or services. That we could produce so for example as a society. We could make only capital goods or we could make only consumer goods or to come or some combination of the two okay.
It could be anywhere along this curve. Now how much we actually produce might be somewhere in here. The production. Possibility frontier is showing our potential what we could do okay and later in other levels.
We re gonna look at what happens when what you actually produce doesn t match that potential that s a gap and what kind of gap. Do we have and how do we fix that that s where that s where we re going eventually. There s some kind of gap between where we are and where we could be and we can look at how we can fix the economy to get there so right now as we focus on potential gdp. It s the combination of his goods.
They uses all of our resources. So if we re not using all of our resources. We re gonna be somewhere underneath. That curve well today s topic and this week s level is about economic growth.
That is how do you get that production possibility frontier and this potential gdp to shift outward how do we get more of all kinds of goods and services that s sustainable economic growth. But before we get there let s ask ourselves a question about this production. Possibility frontier let s suppose that you run your own country. Okay.
You re the dictator of your own command economy..
And you have a choice. What combination of goods is your country going to produce so an option a you produce mostly capital goods and only a bit of consumer goods option b you produce mostly consumer goods and only a little of capital goods well let s think back. What did it mean to be a capital good capital. Good was a good that is produced and then used to make something else so if your country makes predominantly capital goods then that means that you re going to have an ability to have more goods in the future right because you re making the tools now so that we can make things with those tools next year.
But the problem is is that you re focusing on capital goods. Which means the amount of consumer goods. The things you can enjoy now are not readily available. So an option a your people are gonna starve this year.
They re making all the tools to make things next year. But that means they have nothing now your what about option b option b. Says. We re gonna make lots of consumer goods.
Which means your people get lots of goods now but in the future as your population grows and when you need more things in the future because you didn t invest in capital goods. You have no machines or tools. You won t be able to make those other items in the future. So with option b your people starve next year.
And while this might be a simplification each country and the economies within it whether that s at the provincial level or at the federal level nationwide have to make decisions about which industries to encourage which ones to support which ones to protect and so they have to keep in mind this trade off in terms of making more capital goods and making more consumer goods and encouraging that right combination that allows for people to thrive. Now. And for that economic growth and thriving in the few well we want to know about economic growth. We want to know how do we get out here.
How do we get that potential gdp to increase..
So that we have more in the future. Well let s look at that there are really four factors that contribute to economic growth. These are the four things that increase our potential gdp that is they change the size the economy could be if we used all of our resources. So we re talking about we re talking about sustainable economic growth.
Because short term economic growth is when you re getting your actual to meet your potential right you re not using all of your labor. So if you can start using your labor your actual gets to your potential the economy grows. We want to talk about a sustainable economic growth. That is getting the potential to increase.
So that we are making more goods and services. Even when we re using all of our resources. Well. There are four ways to do that one is you increase your natural resources.
So canada already has lots of natural resources. So we re not seeing tons of economic growth come from there because we already have natural resources. When countries see economic growth from increasing their natural resources. Typically they re taking over other countries to get more resources.
So. If you think about the colonization of africa back in 1880. The reason that you had england and france and belgium in these countries move in to africa and colonize. This area is because they were looking for more natural resources.
So they could get economic growth..
Today. We look at russia and russia s expansions into georgia ukraine or moldova. All of this is to get access to more of their resources to helped create economic growth for their country. The second way you can create economic growth is to increase your real capital.
So we could increase our spending on machines and tools and technology. So if we can get more businesses buying machines mechanizing things then we re going to produce more goods and services. The third option is to see an increase in technology. So when companies do research and development and come up with new ways to make things then we become more efficient and that means that we re producing more goods and services per person per worker.
And so the total amount of goods and services were able to produce using all of our workers and machines increases. So an increase in technology will also create economic growth. The fourth way to increase potential gdp and get that sustainable economic growth is to increase the quantity and quality of your labor. Now which one of these four do you think is the dominant source of canadian economic growth.
Which one does most of our economic growth come from well. The answer is the quantity and quality of labor. So we ll look in more detail about how you increase the quantity and quality of labor since this is the primary source of canadian. ” .
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