CH4

Question 1

economic development

Answer 1

improvements in living standards and in the quality of life

Question 2

economic growth

Answer 2

measures only growth in economic production - may not reflect all aspects of economic development, as growth often results in negative impacts on the quality of life (eg. pollution)

Question 3

2 main explanations of why some countries are wealthy and some are poor

Answer 3

geography & institutions

Question 4

factors of production

Answer 4

the inputs used to produce a good or service in order to produce income - are fundamental determinants of output

Question 5

value added

Answer 5

value of output - value of inputs used in production
is the basis for measuring production in the economy (avoids double counting)

Question 6

factor abundance

Answer 6

the relative availability of the different factors of production

Question 7

do highly developed countries have more labour or capital

Answer 7

capital, production relies more heavily on capital

Question 8

do poor countries have more labour or capital

Answer 8

labour, which results in capital of lower quality

Question 9

Production Function

Answer 9

mathematical expression of the joint effect on the factors of production

Question 10

Production Function Equation

Answer 10

Yt = F(Kt, Lt)

Question 11

if a firm had either no labour or no capital, the output of the production function would be:

Answer 11

zero

Question 12

constant returns to scale

Answer 12

if we multiply each factor by the same number, output is also multiplied by that number

Question 13

increasing returns to scale

Answer 13

output is multiplied by more than 2 if labour and capital are multiplied by 2

Question 14

decreasing returns to scale

Answer 14

output is multiplied by less than 2

Question 15

factor productivity

Answer 15

the contribution of each factor of production to output

Question 16

average labour productivity

Answer 16

obtained by dividing national output by total employment in the economy; tells us how much on average one worker contributes to national output in a given year

Question 17

capital intensity

Answer 17

how much capital there is per worker

Question 18

marginal productivity

Answer 18

the output increase caused by an additional unit of labor (or capital) in the economy

Question 19

diminishing marginal productivity

Answer 19

the more labour (or capital) added to the economy, the smaller the additional output that will be generated

Question 20

factor shares

Answer 20

the share of national income used as payment for the share of capital (or labour) in production

Question 21

growth accounting

Answer 21

estimates what percentage of an economy’s growth rate we can explain using the growth rate of the labour force, the growth rate of the capital stock, and residual factors

Question 22

total factor productivity

Answer 22

the part of output that labour and capital cannot explain; the result of technological progress

Question 23

steady state

Answer 23

population grows at rate n, savings rate is s, capital accumulation is such that the level of capital intensity remains the same period after period

Question 24

human capital

Answer 24

the knowledge embodied in people

Question 25

income convergence

Answer 25

poor countries should grow faster than rich countries because they have a higher marginal product of capital

Question 26

is there a negative correlation between initial GDP per worker and growth?

Answer 26

no

this could be explained by differences in tech change across countries

Question 27

endogenous growth theory

Answer 27

suggests growth is generated by endogenous technical change resulting from entrepreneurial innovation

Question 28

non-rival good

Answer 28

good that can still be consumed by the seller even after it’s sold

Question 29

excludable good

Answer 29

a seller can exclude others from its consumption

Question 30

monopoly rents

Answer 30

extra profits derived from monopoly status

Question 31

extractive/predatory institutions

Answer 31

intended to exploit a country’s resources

Question 32

why does endogenous growth predict rich countries should grow faster than poor countries?

Answer 32

because their knowledge base is larger

Question 33

solow model assumes:

Answer 33

diminishing marginal returns to capital

Question 34

endogenous growth theory derives economic growth as based on:

Answer 34

technical change

Question 35

role of geography as an explanation for large differences in income across the world (2)

Answer 35

1) economic activity is more difficult in tropical areas because of the head & tropical diseases
2) landlocked areas are more isolated & have less access to trade opportunities

Question 36

solow model vs endogenous growth theory

Answer 36

exogenous growth model/ solow model
- assumes perfect competition, in which factors are paid according to their marginal productivity and capital accumulates until the marginal product of the last unit of capital invested is equal to the interest rate or rental price of capital.
- Innovation is exogenous
- Predicts convergence of income levels between poor and rich countries because poor countries with low capital intensity can acheive higher growth rates.

endogenous growth model/romer model:
- sees imperfect competition is necessary for growth. Monopoly rents provide incentive for innovation, which leads to growth.
- Innovation is endogenous and depends on stock of knowledge and r&d
- Predicts divergence of income levels between poor and rich countries bc rich countries will grow faster than poor countries due to their higher existing stock of knowledge. the theory holds that the more knowledge is in the economy, the higher its growth rate.

Question 37

boundless knowledge based growth

Answer 37

The endogenous growth theory holds that economic incentives have the potential to bring about technological change that significantly reduces our use of finite resources and helps us transition to the use of renewable resources.
It considers the possibilities of knowledge production to be infinite.

Question 38

Human capital vs knowledge

Answer 38

human capital: finite, w a limit to growth
- constrained by population growth because it exists in people

knowledge: can theoretically grow boundlessly because it is not necessarily embodied in people
- constrained by number of people doing research

Question 39

In what circumstance can human capital grow faster than population?

Answer 39

where educational level is low, human capital can grow faster than population when progress is made in providing better quality education

Question 40

What type of economic good is knowledge?

Answer 40

Knowledge is
1. non-rivalrous: can still be consumed by the seller even after it is sold
2. excludable: seller can exclude others from its consumption

Question 41

Why innovate?

Answer 41

Entrepreneurs want to improve technology by either lowering costs for producers or delivering a new product to consumers. They do this in hopes of receiving the maximum amount of money from their innovations.

Incentive to innovation: monopoly rents =extra profits derived from monopoly status (exclusive rights to produce their innovation)

monopoly rents create imperfect competition but provides incentive to innovate

Question 42

Romer model production function equation

Answer 42

Yt = Kt^alpha(At * LYt)^(1-alpha)

where
At = stock of knowledge
LYt = productive labor

such that

At*LYt = human capital in the productive sector

Question 43

Romer model labor function

Answer 43

Lt= LYt + LAt

where
LYt = labor force in productive sector

LAt = labor force in research sector

Question 44

Arguments for strict vs un-strict intellectual property rights enforcement

Answer 44

Un-strict enforcement:
Creates incentives required to motivate innovation, which will in the end benefit the poor.

Strict enforcement:
1. Alowing poor countries to produce innovations from rich countries gives poor the chance to catch up in growth rate and counter divergency
2. increases demand for innovation from innovating firms and rich countries
3. developing countries can achieve better economic outcomes if they have quicker access to technological transfers.

Question 45

Knowledge externality tradeoff

Answer 45

overly strict enforcement of property rights is not optimal in terms of encouraging development in poor countries

tradeoff : incentives to innovation from strict enforcement vs benefits to developing countries from tech transfer from un-strict enforcement

Question 46

2 geographic facts relevant to growth

Answer 46

1. latitude (distance to the equator)
   - poorest countries of the world are located in those tropical latitudes closest to the equator
   - richest countries tend to be located in the more temperate zones, outside the tropics
2. geographic isolation
   - much less population density in landlocked areas

Question 47

What are the two competing hypotheses that explains differences in total factor productivity?

Answer 47

1. Geography: differences in climate and geographical isolation cause differences in economic growth rates.
2. Institutions: countries w strong institutions to protect property rights and investments will grow and develop faster than countries with weak institutions.

Question 48

why does geography matter for growth and development?

Answer 48

1. the tropics are less hospitable because of tropical diseases and intense heat
   - disease –> increased mortality and negative impact on general health
   - extreme heat –> reduces labor productivity, especially for farmers
2. the tropics experience significant volatility in rainfall amounts
   –> negatively impacts the stability of agricultural production
3. landlocked areas have high transportation costs
   - restricts trade (as compared to coastal areas w ports)

Question 49

reasons why geography may not be the main cause of differences in development

Answer 49

1. if geography played a major role in development, countries that were disadvantaged by geography should have always been poorer than countries located in more fortunate places
   - but this is not always true
   - ex Azetcs in Mexico and inca and peru were among most developed civilizations in the world but are now among the poorest areas

Question 50

reversal of fortune study

Answer 50

• Acemoglu, johnson, and robinson documented trend of negative correlation between development in 1500 and development today

method
- proxy for development: level of urbanization (correlates to higher development since need high productivity of agriculture and well developed system of commerce and transport to sustain large cities)
- take measure of institutions from an indicator called “protection against expropriation risks”

results
- clear negative correlation between urbanization rates in 1500 and GDP per capita in 1995
- positive correlation between log GDP per capita and protection against expropriation risks
- institutional differences in developing countries are correlated with settler mortality at time of colonization

conclusion
- found that colonization by European powers destroyed civilizations and led to decline in development
- differences in development across world therefore likely more explained by institutions than geography

Question 51

relationship between settler mortality and development

Answer 51

• some areas were inhospitable due to disease to settle in, even though they had valuable natural resources
• set up extractive institutions intended to exploit the countries resources
  —> enslaved local native peoples and forced them to work, causing disease and death
  ex congo
• other areas were hospitable for settling, and so became neo-european states where institutions protecting property rights were established.
• type of institutions created long lasting effect on growth in former colonies