CH10 - Long-Run Economic Growth Flashcards
What is economic growth?
Sustained, long-run increases in the level of real GDP and real per capita GDP
When do increase in material living standards occur?
When real PER CAPITA output increases
An important cost of economic growth is the sacrifice of current _________ in exchange for investment that raises future ___________
consumption
consumption
What are the 4 major determinants of economic growth?
- Growth in the labor force
- Growth in human capital
- Growth in physical capital
- Technological improvements
What determinant is this:
A policy to subsidize R&D activities
Technological improvement
What determinant is this:
A reduction in unemployment insurance benefits
Increases in the labour force.
What determinant is this:
A policy to subsidize general education
Growth in the human capital
What determinant is this:
The provision of investment tax credits
Growth in physical capital
In the long run, changes in average material living standards are best shown by what?
Growth in real per capita GDP
What are 2 main benefits from economic growth?
Rising average living standards
Addressing poverty and income inequality
What is the change in the whole society’s consumption pattern?
People shift away from tangible goods toward services
because economic growth raises average income
Why is economic growth a benefit to address poverty and income inequality?
It’s much easier for a rapidly growing economy to be generous toward its less fortunate citizens than it is for a static economy
It’s easier to reduce income inequalities while still allowing all incomes to rise
What are the 2 major costs of economic growth?
- Forgone consumption
- Social costs
What is forgone consumption?
Sacrifice of current consumption, to have more goods and services in the future, thus more consumption
What are the social costs of economic growth?
The process of economic growth is disruptive for some businesses and workers.
Existing firms, products, and skills are made obsolete by new firms, products, and skills
What is the growth in the labor force
Growth in population or increases in the fraction of the population that chooses to participate in the labor force cause it to grow
What is the growth in human capital
Set of skills workers acquire through formal education and on-the-job training.
Human capital can be thought of as the quality of the labor force
What is the growth in physical capital
The stock of physical capital grows only through the process of investment.
We include here improvements in the quality of physical capital
What are technological improvements
Innovations that introduces new products, new ways of producing existing products, and new forms of organizing economic activity
What are the 3 types of savings?
Public Savings
Private Savings
National Savings
What is the public savings equation?
Public savings = Tax revenue - gov. expenditure
What is the private savings equation?
Disposable income - Tax - Consumption
Y - T - C
What is the national savings equation?
Private + Public Savings
or
Y* less C less G
When is the equilibrium interest rate determined in the long-run version of the macro model?
Where desired national savings = desired investment
What happens to the price of credit if
NS > I
Excess supply pushes it down
What happens to the price of credit if
NS <I
Excess demand pushes it up
In the long run, (Y = Y*)
Equilibrium in the market for loanable funds determines the interest rate as well as the amount of ___________ (2)
desired saving
and
desired investment in the economy
What will change following a shift in either the supply of national saving or the demand for investment (2)
Equilibrium real interest rate
And
The rate of growth of potential output in the economy
An increase in the amount of the economy’s resources devoted to _________ leads to an increase in the growth rate of _________ output
investment
potential
Why is the investment curve downward sloping?
Because a rise in the real interest rate increases the opportunity cost of investment
or
A fall in the real interest rate decreases the opportunity cost of investment
An increase in the NS function will shift it how?
To the right
If a fiscal contraction happens by increasing taxes, what happens to the NS and I graph?
To the equilibrium interest rate?
To the amount of investment?
To the long-run growth?
The NS function shifts right
Equilibrium interest rate decreases
Investment Increases
Long-run growth increases
How can government encourage national savings? (2)
By creating incentives to save (or disincentives to consume) and limiting government deficits
How might government encourage investment?
Increase or create tax deductions and tax credits for investment expenditure
In Neoclassical growth theory, when any one of the factors increases on its own while the others are fixed, the aggregate production function exhibits ______
Diminishing marginal returns
When there is diminishing marginal returns, each additional worker, compared to the previous worker, adds _______ to total output
Less
What is balanced growth?
When capital and labor grow at the same rate, GDP will increase
”Balanced growth” refers to a situation where the labour growth rate is _______ the rate of growth of capital (both human and physical capital). Since increases in living standards are determined largely by increases in ________, it is clear that balanced growth ______ to explain rising material living standards.
equal to
per capita real output
unable
Based on the Neoclassical growth model, what is something that could explain improvements in material living standards
An increase in the production of machinery
What is the “Solow Residual”?
The amount of growth in GDP that cannot be accounted for by growth in the labour force or by growth in the capital stock.
Therefore, it’s a measure of the impact of ∆ in tech
What is an embodied technical change?
When a new and better harvesting machine replaces an old harvesting machine on a farm, and is more productive than the old one.
In Neoclassical growth theory, an increase in the labour force alone _________ total output and
________ _________ the level of per capita output
increases
eventually decrease
In the newer growth theories, we assume that technological change is _______ to the economic system
endogenous
Modern growth theories are more optimistic because they emphasize the unlimited potential of what?
Knowledge
Why is the diffusion of technological knowledge is described as a costly process?
Because the use of new technology often requires knowledge that is learned only through experience
Why is the resource exhaustion problem believed to be solvable?
Because advances in technological knowledge go hand in hand with an increase in resource efficiency
