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ECON 2120 > Chapter 12: Growth Theory > Flashcards

Chapter 12: Growth Theory Flashcards

1
Q

Based upon inference from widely accepted principles

A

Deductive Reasoning

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2
Q

The process of discovering explanations for a particular set of facts by estimating the weight of observational evidence in the form of a proposition which asserts something common to the entire class of facts

A

Inductive Reasoning

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3
Q

Good Economic Theories are:

A

(1) Simple
(2) Flexible
(3) Useful for making accurate predictions

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4
Q
  • Serves as the foundation of growth theory
  • Began in the 1950’s
  • We must accept imperfection
A

Evolution of Modern Growth Theory: Solow Model 1

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5
Q

Describes the relationship between the inputs the firm uses and the outputs it creates

A

Production Function

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6
Q

Solow Model I’s Main Focus

A

Physical Capital

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7
Q

Reason behind why Solow Model I focused on Physical Capital?

A

(1) Increasing tools available can increase output per worker
(2) Capital in wealthy nations exceeds capital in developing nations
(3) Periods of investment growth and periods of expansion

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8
Q

How do economists measure the impact of resources?

A

Marginal Product

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9
Q

The change in output associated with one additional unit of an input

A

Marginal Product

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10
Q

Occurs when the marginal product of an input falls as the quantity of the input rises

A

Law of Diminishing Marginal Return

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11
Q

Implications of Solow I:

A

(1) Steady State

(2) Convergence

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12
Q

The condition of a macroeconomy when there is no new net investment

A

Steady State

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13
Q

A long run equilibrium point in which there is no new net investment

A

Steady State

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14
Q

Net Investment

A

Investment minus depreciation

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15
Q

Capital Stock is ______.

A

Constant

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16
Q

A fall in the value of a resource over time.

A

Depreciation

17
Q

The idea that per capita GDP’s across nations equalizes as nations approach the steady state

A

Convergence

18
Q

Why Solow I Model Failed?

A

(1) Growth in wealthy nations consistently outpaces poor countries
(2) No sign of convergence

19
Q

Capital and Growth

A
  • Capital is associated with economic growth, but association is not causation
  • We observe strong correlation between wealth and output
  • Workers are more productive with more tools
20
Q
  • Adjustments acknowledge how technology can lead to economic growth
  • With technology nations can produce more output with each input
  • Model now includes capital plus exogenous technology
  • Graphically, marginal product increases, shifting the production function upward
A

Solow II Model

21
Q

Solow II assumes that change in technology are _______________.

A

Exogenous

22
Q

Growth that is independent of factors within the economy.

A

Exogenous Growth

23
Q

Two assumptions for the Solow II Model:

A

(1) Technological progress often is luck and is also often random
(2) It made the theoretical models easier to solve

24
Q

Policy Implications of Solow II:

A

(1) Solow II emphasizes the importance of technology and capital
(2) For low income countries to grow, they need the latest technology available
(3) High income countries can help by funding capital investment in poor countries

25
Q

Results of Solow II Implementation:

A

(1) Actual capital goods were built outside aid (exogenously provided by the West)
(2) Aid was given to developing countries to fund the building of infrastructure

26
Q

Results of the Policies Implemented by Solow II Model:

A

(1) Some countries received billions in aid and are no better off today than they were in 1960
(2) Other countries received almost no aid and have grown rapidly

27
Q

Technological change is __________ and depends on factors that currently exist in the economy.

A

Endogenous

28
Q

Results of Solow II Aid Program

A

(1) Some countries received billions in aid

(2) Other countries received almost no aid; yet they’ve grown rapidly

29
Q

Is an approach that focuses on technological change and institutions

A

New Growth Theory

30
Q

With the new growth theory, technological change is now considered ___________.

A

Endogenous

31
Q

Because technological change is endogenous, nations need to create an environment that encourages technological change.

A

Institutions

32
Q

Positive Institutions

A

(1) Transparent and consistent government
(2) Private property rights
(3) Stable money and prices

33
Q

Negative Institutions

A

(1) Corruption

(2) Political Instability

34
Q

Institutions that Foster Growth

A

(1) Political stability and rule of law
(2) Private property rights
(3) Competitive markets
(4) International trade
(5) The flow and funds across borders
(6) Efficient taxes
(7) Stable money and prices

ECON 2120 (8 decks)

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