Chapter 10- Economic Growth & Productivity Flashcards
how do we measure RGDP per capita growth rate?
you take the Nominal GDP and you subtract the inflation rate and the population growth.
NGDP - Inflation - Population growth
How do we measure Economic growth?
it is Measured as RGDP per capita and is the key determinant of living standards.
Economic growth describes the change of purchasing power for each person
What is the rule of 70 and how is it measured?
The rule of 70 states the years it will take for income to double when a growth rate is given. (interest)
70 / growth rate of anything = years it takes to double in size
the higher the growth rate, the less time it takes to double.
what are some things that help grow the economy?
- increase in outputs (G+S)
- increase in labour (input utilization, workers)
- increase in productivity
what does productivity include?
- Physical capital (K)
investments that help firms
produce G+S - Human capital (L)
Knowledge, skills, experience and talent - Natural resources (N) come from the earth, renewable: trees, wind
non-renewable: oil, gas - Technology (A)
new inventions that can produce more outputs with the same amount of inputs
What is productivity?
it is the amount of G+S a worker can produce in each hour.
Measured by output/worker
P = Y/L
What is a production function?
It captures the relationship between the quantity of inputs and outputs.
Output (productivity) = Technology ( Capital, labour, resources)
Y = Af (K, L, N)
to increase productivity, (Y) we need to put more money towards physical capital
what are Diminishing returns
when capital stock rises, productivity rises which also brings up the GDP levels.
as you add variable resources to fixed resources, the output will eventually decrease.
firms need to find the middle space of adding or taking away capital to the economy to ensure maximum productivity and profit
long run: when you save money it all goes back to consumption.
What is the Catch- up effect?
convergence theory
when poorer countries will grow faster than richer ones until they catch up.
all countries converge at the same growth rate, even if they don’t have the same income.
Investment Trade off
Saving money is a trade-off, you have to reduce your consumption to put money in the bank.
saving money increases future consumption
What is Foreign Direct investment?
when our country does not save enough and has to borrow money from different countries.
Different ways to increase productivity
Having a stable and effective government that knows how to trade and invest
Gov. must be open to free trade with all countries
Human Capital model: when the government invests in post-secondary to increase future economic productivity
sift out model: weeding out the broke and dumb students
explain foregin aid for low income countries
Countries that are labelled ‘poor’ get foreign aid through loans or funding.
however this can put locals out of business and out of their jobs.
formula used to find the growth rate of inputs and the growth rate of outputs
Gy = Ga + &Gk + (1- &) G l
