Ch. 10- Economic Growth Flashcards
How is economic growth measured?
Real GDP per capita
Rule of 70
Estimates the length of time for an economy to double itself.
Periods to Double = 70/Growth Rate per Period
Compounding
Economic growth that builds on itself over time.
(True/False): Economic growth is relatively new in the context of history
True
Compounding of Interest
The idea that earlier interest payments get added to the account and earning interest in turn.
Makes a seemingly low growth rate (ex. 2%) more impressive!
How is productivity measured?
Output per worker (Y/L)
What explains the diversity in economic growth around the world?
> Increases in inputs
Increases in input utilization
Increase in productivity*
Economic Growth
Increase in the production of goods and services over a specific period of time.
What are the components of productivity?
> Physical Capital (K)
Human Capital (L)
Natural Resources (N)
Technology (A)
Physical Capital (K)
Equipment and structures for the production of goods and services
Human Capital (L)
Skills, knowledge, experience, and talent that determine productivity.
Natural Resources (N)
Inputs that come from nature
2 types:
Renewable resources- replenish naturally over time (ex. Water for a hydroelectric plant)
Non-renewable resources- finite and do not replenish (ex. Coal)
Technology (A)
Improvements in the field mean the same inputs will produce increased outputs.
Level of Savings
Determines how much a firm can invest.
Level of Income
The current amount of income a country possesses
Rate of Income
The change in the amount of income a country possesses
Growth Accounting
The relationship between the growth rate of inputs and the resulting growth rate of outputs. Can be used to calculate the growth rate of technology (harder to determine than other components)
Represented by Equation 10-4
Decreasing Marginal Returns to Factors of Production
Countries that start with very little physical capital will get a higher return from adding a unit of capital than a country that starts at a higher initial level.
Convergence Theory (catch-up effect)
Poor countries will grow faster than rich countries until they “catch up” and all countries “converge” at the same growth rate.
Investment Trade-off
Reduction in current consumption to pay for the investment in physical capital intended to increase future production/consumption.
Domestic Savings
Savings that come from within a country. If domestic saving < domestic investment, the difference is foreign investment.
Domestic Savings = Domestic Income - Consumption Spending.
Foreign Direct Investment (FDI)
An investment that is financed with foreign money but operated by domestic residents.
