1 - Basics Of Economic Growth

Question 1

Define economic growth

Answer 1

Sustained expansion of production possibilities measured as increase in Real GDP over a given period

Question 2

Annual economic growth rate concepts

Answer 2

• Real GDP
• Real GDP per person
• Rule of 70

Question 3

Causes of economic growth (the quantity of factors)

Answer 3

• Rate of investment
• Rate of discovery and exploitation of new resources (e.g. oil)
• Population growth and participation rates (employment)

Question 4

Causes of economic growth (factor productivity)

Answer 4

• Attitudes towards risk-taking
• Technological progress (new technology)
• Education and training
• Institutions and infrastructure supporting innovation

Question 5

3 Growth theories, examples of each of them

Answer 5

• Classical growth theory (Malthusians)
• Neoclassical growth theory (Solow-Swan Model)
• New growth theory (Endogenous growth model)

Question 6

Describe classical growth theory (Malthusians)

Answer 6

• Malthusianism is the idea that population growth is potentially exponential while the growth of food supply and other resources is linear
• Stage 1 = Living standard increases
• Stage 2 = Population growth greater than food supply (resources supply)
• Stage 3 = Living standard declines

Question 7

Describe Neoclassical growth theory (Solow-Swan model is an example of this theory)

Answer 7

• Capital Accumulation (machinery, equipment, infrastructure) is key for economic growth.
• Technological progress = Was considered exogenous (external factor) for economic growth
• Diminishing returns = As a country adds more units of capital, additional output gained from each unit becomes smaller
• Convergence = This theory predicts poorer countries to catch up with richer ones over time. Technological progress, capital accumulation and diminishing returns will lead to convergence in per capital income levels

Question 8

Describe New Growth Theory (Endogenous growth model)

Answer 8

• Research and development, fostering innovation and imitation (frontier theory)
• Focuses on internal factors like human capital, R&D and innovation as key driver for economic growth
• Technological progress is seen as internal. Developing R&D, education and human capital are seen as crucial for fostering innovation and technological progress
• Overcomes the weakness of exogenous growth model like, knowledge is not a subject to diminishing returns (e.g. Human capital accumulation)