13.7: Key Concepts

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Economic growth is the percentage annual increase in real GDP or per capita real GDP. It is an imperfect measure of the rate of increase of economic well-being because of the limitations of the measurement of GDP.

Very long run: the time required for changes to occur in the stock of capital, the size of the labour force, and the technology of production.

Total factor productivity (TFP): output relative to the combined inputs of labour and capital, the total factor inputs to production.

Growth accounting: a method of measuring the contributions of growth in inputs of labour and capital and the state of technology to overall growth.

Solow residual: the growth in real GDP or per capita real GDP not caused by growth in factor inputs, but attributed to improved technology.

Growth in per capita real GDP has two main sources, namely, growth in the ratio of capital to labour in the production process, and improvements in technology. Growth accounting provides a way of measuring the sources of growth in per capita real GDP.

Marginal product: the change in total output caused by a change of one unit in the input of that factor to production.

Sustained growth in per capita real GDP: improvements in technology overcome the diminishing returns to increases in the capital to labour ratio.

Recent research on the growth of Canada's potential GDP found that the contribution of productivity growth from technology declined in the 1980s and early 1990s and again from 2000 to 2005.

Invention: the discovery of new knowledge.

Innovation: the application of new knowledge into production techniques.

Exogenous variable: a variable with a value determined outside the model.

Endogenous growth: growth determined economic behaviour and policy within the model.