Foundations of Economics, 8th Edition

Chapter Summary

Key Points

1. Explain what determines potential GDP.

   • Potential GDP is the quantity of real GDP that the full-employment quantity of labor produces.

   • The production function describes the relationship between real GDP and the quantity of labor employed when all other influences on production ­remain the same. As the quantity of labor increases, real GDP increases.

   • The quantity of labor demanded increases as the real wage rate falls, other things remaining the same.

   • The quantity of labor supplied increases as the real wage rate rises, other things remaining the same.

   • At full-employment equilibrium, the real wage rate makes the quantity of labor demanded equal the quantity of labor supplied.

2. Explain what determines the natural unemployment ...