CH 9: Production and Growth

Question 1

What is the Rule of 70?

Answer 1

It takes 70 years to double GDP if GDP = 1%.

It takes 35y to double GDP if GDP = 2%.

Question 2

Define productivity

Answer 2

G/S produced by workers in an hour.

Measure of SoL.

Question 3

Define factors of production

Answer 3

inputs used to produces G/S
Labour (Human capital, knowledge of engineer, doctor, etc).

Land (natural resources)

Capital (equipment and structures)

Entrepreneurship ( technology)

Question 4

Govt policies that raise productivity and living standards? (6)

Answer 4

1) Encourage saving and investment.
2) Encourage investment from abroad.
3) Encourage education and training.
4) Secure property rights and political stability.
5) Promote free trade.
6) Promote R&D.

Question 5

1) Encourage Saving and Investment

Answer 5

More capital increases productivity and SoL.
Diminishing returns. As more capital is put in, less output compared to original.
This is why giving capital to poor countries results in more growth than rich.
Leads to “Catch-Up Effect”. Countries that start off poor grow more quickly than the rich.

Question 6

2) Investment from abroad.

Answer 6

Foreign Direct Investment:
Capital investment owned and operated by a foreign entity.
Foreign Portfolio Investment:
Investment financed by foreign money, operated by domestic residents.

Question 7

3) Education and training

Answer 7

Smarted workforce means more ideas. Boost society knowledge.
Can lead to brain drain - emigration of highly educated workers from original country.

Question 8

3) Health and Nutrition

Answer 8

Healthy workers end up having increased productivity.

Question 9

4) Property rights and political stability

Answer 9

Important for investors to feel their investments are secure.

Question 10

5) Free trade

Answer 10

Same effect as tech advance.
Inward-focused = avoid interaction e.g. NK, Argentina, Bolivia
Outward-focused = encourage interaction with other countries.

Question 11

Effect of Taxation on Growth

Answer 11

Tax on income = growth falls.
Tax on consumption = encourage savings, more capital per worker. Growth rises slightly?
If tax revenue is spent on healthcare, education and infrastructure, will decrease consumption maybe but growth will increase in the long term.