The purpose of this chapter is to try to explain growth in GDP . The models in this chapter are very different from the rest of the models in this book as they use only the production function and factors of production to explain growth.
We have now reached the second part of this book. The first Interest ratewas a description of the macroeconomic variables and institutions. In the second part, we will analyze how these variables fit together and present models that explain the main macroeconomic variables.
When you borrow money, you usually have to pay a fee for the loan. This fee is often called interest, particularly if the fee is proportional to the amount you borrow. The interest rate is commonly expressed as a percentage of the size of the loan per unit of time, typically per year.
If the interest rate is 10% per year, you must, for example, pay 1,000 per year if you borrow 10,000. The interest rate may be fixed or floating. If it is fixed, you will pay the same percentage for the entire duration of the loan. With a floating interest rate, the interest rate will change regularly depending on market conditions.
Before discussing macroeconomic models we must define what we mean by money. Money has a long and interesting history and an understanding of how we came to use money is useful for any macroeconomist. Unfortunately, there is not enough space to describe how money was “invented” and how it evolved over time. There are, however, many excellent descriptions on the Internet.
An important macroeconomic variable is the total amount of labor that is used in a certain time period. The amount of labor and the amount of capital are important explanatory variables for production and GDP. Another reason for the importance of the amount of labor is that it is related to the unemployment rate – a macroeconomic variable which is clearly important.