Chapter 10: Economic Growth

Question 1

what is a production function

Answer 1

it determines the total production possible with a set of ingredients. it describes how businesses transform inputs into outputs

Question 2

what does an aggregate production function relate to? and what are the key ingredients and what is the equation that relates them all?

Answer 2

it relates to GDP and the quantity of input employed.

labour (L)
human capital (H)
Physical capital (K)

Y = f(L, H, K)

Question 3

true or false: the aggregate production function includes a separate role for intermediate inputs

Answer 3

false, because intermediate inputs are produces elsewhere in the economy

Question 4

what happens to the production function when you find new production techniques?

Answer 4

it will shift the production function

Question 5

the Labour input / total hours worked, reflects four factors

what are they

Answer 5

• size of population
• fraction of working age
• fraction of working age people working
• how many hours each worker works

Question 6

define labour productivity and what does it depend on

Answer 6

output per hour of work.

depends on human capital (the skills and knowledge employees have)

Question 7

define capital stock

Answer 7

the total quantity of physical capital

Question 8

define technological process

Answer 8

it refers to new methods for using existing resources, new methods create ways to produce more valuable output from the same amount of inputs

Question 9

the production function can give insight into economic growth

what are the 6 discussed

Answer 9

1. constant return to scale means doubling inputs will double output, the replacement argument (but GDP per person will stay the same)
2. there are diminishing returns to capital, diminishing law of returns
3. poor countries can enjoy catchup growth (rapid growth that occurs when a relatively poor country invests in capital)
4. capital stock will grow as long as investment outpaces depreciation (capital stock is subject to depreciation, need enough investment to handle depreciation and invest)
5. capital per worker will eventually stop growing, when investment = depreciation, capital stock will stop growing
6. capital accumulation cannot sustain long term economic growth, (law of diminishing returns, eventually will reach a steady state)

Question 10

what is the solow model

Answer 10

the set of insight we get from simultaneously analysing the production function, investment, capital accumulation and economic growth

Question 11

what does sustain long term economic growth

Answer 11

technological process

Question 12

why can an idea driven economic growth be sustained and capital driven economic growth cannot.

in what 3 ways are ideas different from physical capital

Answer 12

1. ideas can be freely shared, ideas are non rival, one persons use of an idea does not subtract from another’s
2. ideas do not depreciate with use
3. ideas may promote other ideas, spill over effect

Question 13

what is the problem with ideas

Answer 13

they are nonexcludable, hard for you to prevent others from using and profiting off your ideas

Question 14

what does nonexcludability promote

Answer 14

an incentive to copy rather than innovate

Question 15

what factor determines whether people will invent new ideas

Answer 15

incentives

Question 16

what does “rules of the game” refer to

Answer 16

the institutional structure in country

Question 17

what are institutions that promote economic growth

Answer 17

1. property rights (what’s mine is mine)
2. government stability (guarantee return on investment)
3. efficient regulation (excessive red tape)
4. government policy encouraging innovation