Ch 9 Economic Growth

Question 1

Marginal Product of labour

Answer 1

the extra output generated by adding one more worker (or hour)

Question 2

Average product of labour

Answer 2

total output divided by the number of workers (or total hours)

Question 3

Average Labour Productivity

Answer 3

Real GDP per capita = Average Labour productivity * Employment population ratio
Y/Pop = Y/N * N/Pop

Question 4

Determinants of Average Labour productivity

Answer 4

• Human Capital
  — Education, skills, etc.
• Physical Capital K
  — factories, machines, equipment, roads.
  —–Increase in capital increase the productivity at a decreasing rate
• Land and Natural Resources
• Technology
• Entrepreneurship and Management
• Political and Legal Environment
  —–Political Stability
  —–Well-defined property rights
  —–Open and free exchange of ideas

Question 5

Promoting Economic growth

Answer 5

• Policies to increase human capital
• Policies that promote saving and investment
• Policies that support research and development
• Legal and political framework

Question 6

Annual Compound Growth Rate

Answer 6

Interest = ((Ending Investment Amount/Starting Amount)^(1/# of years)) - 1
rewritten:
g = ((Yt-Y0)^(1/T)) - 1

Question 7

For any series growing at a constant rate (formula)

Answer 7

Yt = ((1+g)^t)*Y0

Question 8

Growth Relationship

Answer 8

Suppose Z = W * Y. Then their growth rates relate as
Growth rate of Z == growth rate of W +growth rate of Y
Suppose

Question 9

Rule of 72 (or the rule of 70)

Answer 9

the number of years it takes for the level of a geometrically growing variable to double is approximately 72 divided by the annual percentage growth rate of the variable.
Example: country has a 6% average annual growth rate. Then its GDP per capita will double in 12 years (72/6 = 12)

Question 10

The aggregate production function

Answer 10

is a relationship that shows how the aggregate real quantity of output is produced using the available factors of production (the inputs: labour, physical capital, and human capital) and technology [A and the function F(…)].

Question 11

The formula for aggregate production

Answer 11

Y= A*F(K,H,L)
Y = aggregate production output
A = total factor productivity (e.g. improvement in technology)
F(…) = aggregate production function
K = amount of physical capital used
H = amount of human capital that is used
L = amount of labour used

Question 12

per worker production fxn

Answer 12

(YL)=A×f((KL),(HL))
(YL)=real output (GDP)per worker
(KL)=real physical capital per worker
(HL)=human capital per worker
A=total factor productivity

Question 13

diminishing returns to physical capital or diminishing marginal productivity of (physical) capital (dim MPK)

Answer 13

A per worker production function exhibits diminishing returns to physical capital or diminishing marginal productivity of (physical) capital (dim MPK) when, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.

Question 14

Growth accounting

Answer 14

estimates the contribution of each major factor in the aggregate production function to economic growth

Question 15

investment spending must be paid for out of __________ savings or _______ savings.

Answer 15

domestic or foreign

Question 16

Domestic savings

Answer 16

savings within the country, which can come from households and/or the government.

Question 17

Foreign savings

Answer 17

are savings that come from foreign countries. If a country finances its investment with foreign savings, it is borrowing from abroad.

Question 18

R&D

Answer 18

Research and development is spending to create and implement new technologies. of

Question 19

Convergence hypothesis

Answer 19

According to the convergence hypothesis, international differences in real GDP per capita tend to narrow
over time.
E.g. East Asian countries achieving rapid growth in just a few decades because they could now adopt the technology and inventions that were created by Canada, US and Europe

Question 20

Government policies through which the growth rate of the economy of the country can be increased

Answer 20

1) Govt subsidies to infrastructure
2) Govt subsidies to education
3) Govt subsidies to R&D
4) Maintaining a well-functioning financial system
a) protection of property rights including intellectual property
b) political stability and good governance

Question 21

Sustainable long run economic growth

Answer 21

is long-run growth that can continue in the face of the limited supply of natural resources and with less negative impact on the environment.