Chapter 10 Flashcards
What is economic growth a powerful means of doing?
It is a powerful means of improving average material living standards
What does economic growth that raises average income tend to do?
It tends to change the whole society’s consumption patterns, shifting away from tangible goods toward services
What does economic growth lead to when providing higher incomes?
It leads to a demand for a cleaner environment
In recent years, the majority of aggregate income growth in many countries, including Canada, has been [given to/not been given to] the top earners in the income distribution
given to
While average per capital incomes have been rising, there has also been a rise in what?
Income inequality
What are important challenges for public policy?
Poverty and income inequality
Is growth sustainable?
No, it is not
Can growth increase overall well-being?
No, it cannot. At least not alone
What is forgone consumption?
It is when consumers consume less in the present in order to consume better goods in the future as a consequence of the promise of economic growth.
What are the social costs of economic growth?
Worker’s skills may become obsolete as a consequence of economic growth since existing skills may not be needed in the future due to the new skills that are made.
What are the 4 major determinants of growth?
- Growth in the labour force
- Growth in human capital (set of skills workers acquire through formal education and on-the-job training)
- Growth in physical capital
- Technological improvement
In the simplest short-run macro model, the equilibrium level of real GDP is equal to what?
Consumption + Desired Investment
In the short-run, real GDP adjusts to determine equilibrium which is what?
Desired Savings = Desired Investment
In the long-run macro model, what is real GDP equal to? What does the model’s interest rate adjust to in order to determine equilibrium?
It is equal to Y*
It adjusts to determine equilibrium
When real GDP is equal to Y* in the long run, what is desired private saving equal to?
Private Saving = Y* - T - C
What is public saving equal to?
It is equal to the combined budget surpluses of the federal, provincial, and municipal governments
Public saving = T - G
What is National saving equal to?
NS = Y* - T - C + (T-G)
NS = Y* - C - G
What does an increase in household consumption or government purchases lead to in terms of national saving?
It leads to a reduction in national saving
What does the supply curve for national saving and the investment demand curve make up?
It makes up the economy’s market for financial capical
What is investment demand negatively related to?
It is negatively related to real interest rate
What is the supply of national saving positively related to?
It is positively related to real interest rate
What does excess supply of saving do to the real interest rate and investment
It drives real interest rate down and encourages more investment
What does excess demand for investment do to the real interest rate
It drives the real interest rate up
What does a higher rate of investment lead to?
It leads to a higher growth rate of potential output
What does an increase in the demand for investment do to the real interest rate? What does it encourage in households?
It pushes up the real interest rate and encourages more saving by households
What does the higher rate of saving (and investment) lead to?
It leads to a higher growth rate of potential ouput
Investment rates has a positive relationship with what?
With growth rates
What is the aggregate production function?
GDP = FT (L,K,H)
L=labour
K=physical capital
H=human capital
T=technology
What does the notation FT indicate?
That the function relating to L, K, and H to GDP depends on the state of technology
What are the key assumptions that are made about the aggregate production function?
The aggregate production function displays diminishing marginal returns when any one of the factors is increased on its own
Constant returns to scale when all factors are increased together
What do we assume of human capital and physical capital for simplicity? Of technology?
That they can be combined into a single variable called capital and that technology is held constant
What is marginal product of labour?
It is positive and diminishing
MPL = ΔY/ΔL
What is marginal product of capital?
It is positive and diminishing
MPK = ΔY/ΔK
By adding one more input, what happens to other inputs?
They are constant
When adding an additional amount of output, what happens to output?
What is being output becomes smaller and smaller
What is the Cobb-Douglas production funtion?
Y = A x Lα Kβ where 0 < α,β < 1
What is constant returns to scale?
Output increases in proportion to the change in all inputs as the scale of production is increased
What does holding capital constant do?
Each additional unit of labour will eventually add less to total output than the previous unit
What is labour-force growth in the Neoclassical model?
In the Neoclassical model with diminishing marginal returns, increases in population (with fixed capital) lead to increases in GDP but an eventual decline in material living standards
What is physical and human capital accumulation in the Neoclassical model?
Capital accumulation leads to improvements in material living standards, but because of the law of diminishing returns, these improvements become smaller with each additional increment of capital
What is balanced growth with constant technology in the Neoclassical model?
If capital and labour growth are the same, then GDP will increase
In the Neoclassical growth model with constant returns to scale, such balanced growth will not lead to increases in per capita output and therefor will not generate improvements in material living standards
What is the hypothesis of the law of diminishing returns?
An increase in quantities of variable factors but used with fixed factors will make marginal product of variable factor eventually decrease
What is the importance of technological change in the Neoclassical model?
Technological change is assumed to be exogenous
New knowledge can contribute to the growth of potential output, even without capital accumulation of labour-force growth
What is embodied technical change?
It is when technological improvements are contained in the new capital goods
What is endogenous technological change?
It is the idea that technological change is responsive to prices and profits, making it endogenous to the economic system
Should workers be afraid of technological change?
No they should not be afraid of technological change since labour markets are likely to continue to adjust to changes in demand and supply for labour so the overall level of employment will grow in line with the population, independent of the rate of technological change
How is growth achieved?
It is achieved through costly, risky, innovative activity that often occurs in response to economic signals
Learning by doing
Knowledge transfer
Market structure and innovation
Shocks and innovation
What do Neoclassical theories of economic growth assume about investment in capital?
That it is subject to diminishing marginal returns
What are the 2 categories of the sources of increasing returns?
Market-development costs
The Economics of Ideas (knowledge)
What do advances in technological knowledge increase?
It increases resource efficiency
What can growth help the world do?
It can help the world address many problems but further growth must be sustainable growth, which should be based on knowledge-driven technological change
