Growth and the Economy’s Potential Output - Growth is an increase in potential output - Potential output is the highest amount of output an economy can produce from Existing production processes and resources - Productivity is output per unit of input - The long-run growth focus is on how to increase potential output - Say’s Law is that supply creates its own demand - The short-run focus is on how to get the economy operating at its potential Importance of Growth for Living Standards - Growth in income improves average living standards - Because of compounding, long-term growth rates can make huge differences - The rule of 72 states - The number of years to double income equals 72/ growth rate - If China’s per capita income of $2,000 grows 9% per year and the U.S per capita income of $40,000 grows 1% per year. - In 40 years, China’s per capita income will equal the U.S and in 9 more years it be Significantly higher than that of the U.S Markets, Specialization, and Growth - Markets, specialization, and the division of labor increases productivity and growth - Specialization is the concentration of individuals on certain aspects of production - Division of labor is the splitting up of a task to allow for specialization of Production - Markets may seem unfair because of the effect that they have on the distribution of income - Even though growth isn’t evenly distributed, it generally raises the income of the poor Per Capita Growth - Per capita output is total output divided by total population - Per capita growth means the country is producing more goods and services per person