Glossary
Economic Growth
An increase in the maximum amount of goods and services an economy can produce over a period of time, represented by a rightward shift of the LRAS or outward shift of the PPC.
Example:
Developing countries often prioritize education and infrastructure to achieve sustained economic growth and improve living standards.
Full Employment
A state where an economy is producing at its potential output, meaning all available resources, including labor, are utilized at the natural rate of unemployment.
Example:
When the unemployment rate is at 4%, the economy is generally considered to be at full employment, even though some frictional and structural unemployment still exist.
Full Employment Output (YF)
The specific level of real GDP that an economy produces when it is operating at its natural rate of unemployment and utilizing all resources efficiently.
Example:
Economists aim for policies that help the economy consistently operate at its Full Employment Output (YF) to maximize societal well-being.
Long-Run Aggregate Supply (LRAS)
LRAS represents the potential output an economy can produce when all resources are fully employed, indicating its maximum sustainable production capacity.
Example:
If a country invests heavily in education and infrastructure, its Long-Run Aggregate Supply (LRAS) curve will shift rightward, showing an increase in its long-term productive capacity.
Natural Rate of Unemployment
The lowest sustainable unemployment rate achievable under normal economic conditions, consisting of frictional and structural unemployment.
Example:
Even in a booming economy, there will always be some people between jobs or whose skills are obsolete, contributing to the natural rate of unemployment.
Policy (as LRAS shifter)
Government actions or regulations that can influence an economy's long-term productive capacity by affecting resource availability, quality, or incentives.
Example:
Tax incentives for research and development are a policy that can encourage innovation and shift the LRAS curve to the right.
Potential Output
This is the maximum sustainable level of output an economy can produce when it is operating at full employment of its resources.
Example:
Even if a country has many factories, if half its workforce is unemployed, it's not reaching its potential output.
Price Level Invariance
The characteristic of the LRAS curve being vertical, indicating that changes in the overall price level do not affect the economy's potential output in the long run.
Example:
If all prices and wages in an economy double, the real quantity of goods and services produced remains the same due to price level invariance in the long run.
Production Possibilities Curve (PPC)
A graphical model illustrating the maximum combinations of two goods an economy can produce given its available resources and technology.
Example:
When a country discovers a new, abundant natural resource, its Production Possibilities Curve (PPC) will shift outward, reflecting increased productive capacity.
Quality of Resources
The productivity, skill level, or efficiency of an economy's factors of production.
Example:
Investments in advanced robotics improve the quality of resources by making capital more productive, leading to higher potential output.
Quantity of Resources
The total amount of available factors of production (land, labor, capital, entrepreneurship) within an economy.
Example:
An increase in immigration can boost the quantity of resources by expanding the labor force, potentially shifting LRAS right.