Ch. 10 - Economic Growth

Question 1

What is a Production Function?

Answer 1

The method by which inputs are transformed into output which determines the total production that’s possible with a given set of ingredients.
Links GDP to labour, human capital, physical capital (Y=f(L,H,K))

Question 2

What is the Solow Model?

Answer 2

• An model designed to show long run economic growth
• It is a production function
• Has ingredients of Labour Input, Human Capital, Physical Capital

Question 3

What is Human Capital? What is Physical Capital?

Answer 3

Human Capital: The skills that workers bring to the job
Physical Capital: Tools, machinery, & structures

Question 4

What is Labour Productivity?

Answer 4

The quantity of goods & services that each person produces per hour of working

Question 5

What is Capital Stock?

Answer 5

The total quantity of capital at a point in time

Question 6

What is Technological Process?

Answer 6

New methods for using existing resources

Question 7

What are Constant Returns to Scale?

Answer 7

Increasing all inputs by some proportion will cause output to rise by the same proportion

Question 8

What is the Law of Diminishing Returns?

Answer 8

When one input is held constant, increases in the other inputs will, at some point, begin to yield smaller & smaller increases in output

Question 9

What is catch-up growth?

Answer 9

The rapid growth that occurs when a relatively poor country invests in its physical capital

Question 10

What are 2 strategies to encourage innovation?

Answer 10

1. Create incentives through intellectual property laws
2. Subsidize research and development