Chapter 11: Economic Growth and the Wealth of the Nation Flashcards
Wealth is a ________ focus.
Long term
Income is a _________ focus.
Short term
Sources of Growth:
(1) Resources
(2) Technology
(3) Institutions (Political and Economic)
(4) Economic Freedom
Wealthier societies provide human beings with better living standards, which includes better:
(1) Nutrition
(2) Educational Opportunities
(3) Economic Freedom
(4) Health Care
(5) Sources of Entertainment
Basic measure of a nation’s income
GDP
Basic, foundational measure of “average living standards”
GDP Per Capita
Tendency to overestimate the severity of economic problems and underestimate the past, present, and future performance of the economy. We fail to understand the speed and scope of human progress.
Pessimistic Bias
People make a grave mistake when they idealize conditions in the past.
The “Good Ole Days” Fallacy
Measured as the growth of real GDP per capita.
Economic Growth
Real Per Capita GDP Over 200 Years
Two centuries ago, everyone was poor and while some countries have experienced growth, many others have left behind.
% Change in Per Capita Real GDP =
% Change in Nominal GDP - % Change in Prices - % Change in Population
If the annual growth rate is X%, the size of that variable doubles every (70/X) years
Rule of 70
Causes of Economic Growth:
(1) Resources (Inputs, Factors of Production)
(2) Technology
(3) Institutions (Economics, Political, Cultural)
The inputs used to produce goods and services
Resources
Factors of Production
Resources
Resources Comprise of:
(1) Natural Resources
(2) Human Capital
(3) Physical Capital
Include physical land and the input naturally occurring in or on the land.
Natural Resources
The resource represented by the quantity, knowledge, and skills of the workers in an economy.
Human Capital
It is possible to expand human capital by ______ the number of workers and ______ the existing labor force.
(1) Increasing
(2) Educating
Comprises the tools and equipment used in the production of goods and services
Physical Capital
The purpose of physical capital?
Aid in the production of future output
The knowledge available for use in production
Technology
Introduces new techniques or methods so that firm can produce more valuable outputs per unit of input.
Technological Advancements
T or F: Economic growth occurs when the resources and technology work together.
True
Significant practices, relationships, or organizations in a society. They are the official and unofficial conditions that shape the environment in which decisions are made.
Institutions
Types of Institutions:
(1) Laws
(2) Regulations
(3) Government
(4) Work Habits
(5) Expectations
(6) Political Behaviors
Important Institutions:
(1) Political stability and rule of law
(2) Private property rights
(3) Stable money and prices
(4) Competitive and open markets
(5) Efficient taxes
The rights of individuals to own property to use it in production, and to own the resulting output.
Private Property Rights
Farmers split commune into family-owned plots and agreed to keep surplus agricultural output beyond government quota.
Xiaogang Agreement
Property Rights Must Be:
(1) Defined
(2) Defendable
(3) Divestible
Without property rights…
- There can be no exchange
- Without exchange there is no specialization
- Without specialization in exchange productivity plummets
- If productivity plummets, so does your standard of living
Three Market Institutions Essential for Economic Growth:
(1) Competitive Markets
(2) International Trade
(3) Flow of Funds Across Borders
Ensures that consumers get the lowest prices and promote competition and innovation
Competitive Market
Allows nations to reap the benefits from specialization and trade
International Trade
Helps firms access funds so they can invest and increase future production
Flow of Funds Across Borders
Taxes sufficient to fund the activities of government while impeding production and consumption decisions as little as possible
Efficient Taxes
Taxes have to be ____ enough to support an effective government but ____ enough as to not reduce incentives for production.
(1) High
(2) Low
Designed to reduce incentives for politically motivated monetary policy, which typically leads to highly variable inflation rates.
Federal Reserve
____________ allows us to produce more output while using fewer resources.
Technological Advancement
Resources:
(1) Land
(2) Labor
(3) Capital
