Chapter 12 - Growth Theory

Question 1

What are the three sources of economic growth?

Answer 1

1. Resources
2. Technology
3. Institutions

Question 2

When was the Solow growth model invented?

Answer 2

1950s

Question 3

Who started growth theory?

Answer 3

Robert Solow

Question 4

What formed the nucleus of modern growth theory?

Answer 4

Solow’s growth model

Question 5

What did early versions of growth theory say was the reason for some nations being wealthy and some being poor?

Answer 5

Capital

Question 6

What does the Solow model start with?

Answer 6

Production function

Question 7

What does a production function for a firm describe?

Answer 7

The relationship between the inputs the firm uses and the output it creates

Question 8

What is the equation for the production function for a single firm?

Answer 8

q = f(human capital, physical capital)

Question 9

What does the aggregate production function describe?

Answer 9

The relationship between all the inputs used and the total output of that economy

Question 10

What does output represent in macro economy?

Answer 10

GDP

Question 11

What is the equation for the aggregate production function?

Answer 11

Y = F(K,HK,L)

Question 12

Y = F(K,HK,L)

What does each letter represent?

Answer 12

Y = Output (GDP)
F = Function of
K = Physical capital
HK = Human capital
L = Natural resources

Question 13

What does output depend on?

Answer 13

The resources available for production

Question 14

What did Solow I focus on?

Answer 14

Capital

Question 15

Solow I focused on ______ rather than _______

Answer 15

Capital; labor

Question 16

What is marginal product?

Answer 16

The change in output / The change in input

Question 17

Explain the marginal product of two ladders

Answer 17

The second ladder will still produce a positive number, but it won’t produce as much as the first did

Question 18

Is marginal product positive or negative?

Answer 18

Positive

Question 19

What does diminishing marginal productivity state?

Answer 19

That the marginal product of an input falls as the quantity of the input rises

Question 20

As capital _______ marginal product _______

Increases or decreases

Answer 20

Increases; Decreases

Question 21

Sketch the Production function graph

Answer 21

Output increases with capital, but each unit of capital yields less additional output

Question 22

According to the idea of diminishing marginal product, where will capital have the highest marginal productivity?
A. in countries with a large amount of labor
B. in countries with a small amount of labor
C. in countries with a large amount of capital
D. in countries with a small amount of capital

Answer 22

D

Question 23

What are the two important theoretical implications of the Solow model?

Answer 23

1. Steady state

2. Convergence

Question 24

What is the steady state?

Answer 24

It is the condition of a macro economy when there is no new net investment

Question 25

What does it mean when an economy reaches the steady state?

Answer 25

Real GDP is no longer increasing and economic growth stops

Question 26

What is depreciation?

Answer 26

It is a fall in the value of a resource over time

Question 27

What is net investment?

Answer 27

Investment - deprecation

Question 28

Does net investment need to be positive or negative in order to increase capital stock?

Answer 28

Positive

Question 29

What is convergence?

Answer 29

It is the idea that per capita GDP levels across nations will equalize as nations approach the steady state

Question 30

What do the following focus on? 1. Solow I 2. Solow II 3. Modern Growth Theory

Answer 30

1. Capital 2. Technology 3. Institutions

Question 31

``` The original Solow model focused on what as the main source of economic growth? A. labor B. education C. capital D. effective government ```

Answer 31

C

Question 32

Sketch the Solow II graph

Answer 32

See notes

Question 33

What is the Solow II equation?

Answer 33

Y = A x F(physical capital, human capital, natural resources)

Question 34

In the Solow II equation what does the A stand for?

Answer 34

Technological change

Question 35

What does new technology mean for output and why?

Answer 35

It means that output will be higher because capital is more productive

Question 36

What does the Solow II model assume about technological change?

Answer 36

That it's random

Question 37

In the second Solow model, how were technology advances modeled? A. Technology depended on institutions in the country. B. Technology was fixed over time. C. Technology shocks were considered random and exogenous. D. Technology grew at a steady rate for most countries.

Answer 37

C

Question 38

What is Exogenous growth?

Answer 38

It is growth that is independent of any factors in the economy (It is random)

Question 39

What are the two reasons for the Solow growth model's assumption that technological advances are a matter of pure luck?

Answer 39

1. Technological progress often is lucky & random | 2. It made the theoretical model easier to solve

Question 40

What do the policy implication of the Solow growth model say wealth comes from?

Answer 40

Capital and technology

Question 41

What is Endogenous growth?

Answer 41

It is growth driven by factors inside the economy

Question 42

What does modern growth theory seek to understand?

Answer 42

Why innovations occur in one place and not the other

Question 43

How does modern growth theory model technology and technological change? A. Technology change is endogenous and depends on factors that currently exist in the economy. B. Technology changes faster in less-developed countries and convergence will occur. C. Technological advances occur at faster rates with a stronger government. D. Technology grows exponentially.

Answer 43

A

Question 44

What are institutions?

Answer 44

They are significant practices, relationships, or organizations in society that frame the incentive structure within which individuals and business firms act

Question 45

What frames the environment within which production takes place?

Answer 45

Institutions

Question 46

What is the equation for the modern growth theory?

Answer 46

Y = A x F (physical capital, human capital, natural resources, institutions)

Question 47

Sketch the modern growth theory graph

Answer 47

See notes

Question 48

What does the modern growth theory build on?

Answer 48

The solow growth model

Question 49

What is voluntary investment?

Answer 49

The ability to evaluate

Question 50

When does voluntary investment occur?

Answer 50

When expected payoffs are greater than costs

Question 51

Why do we call them expected payoffs?

Answer 51

They come later than the costs and are uncertain

Question 52

Why are the proper institutions important for creating economic growth? A. People only work for higher standards of living when they are required to do so. B. Institutions spread the wealth around so people don’t have to work as hard. C. Institutions create the incentive structure in which growth can occur. D. Institutions force people to increase productivity.

Answer 52

C

Question 53

Below is a list of policy proposals that have been advanced to help the economies of developing nations. Determine whether each proposal is consistent with the Solow model, modern growth theory, neither, or both. a. unrestricted international aid to help build a power plant b. aid for a power plant that is dependent on democratic reforms c. microfinance (very small short-term loans for small businesses) d. reductions in trade restrictions

Answer 53

A. The Solow model B. Both C. Neither D. Modern growth theory

Question 54

How do macroeconomic theories evolve?

Answer 54

They evolve in relationship to observation of the real world

Question 55

What is the solow growth model?

Answer 55

It is a model of economic growth based on a production function for the economy

Question 56

How does technology affect growth?

Answer 56

Technology is a sources of sustained economic growth

Question 57

Why are institutions the key to economic growth?

Answer 57

They determine incentives for production and can lead to endogenous growth