Chapter 12 - Growth Theory Flashcards
What are the three sources of economic growth?
- Resources
- Technology
- Institutions
When was the Solow growth model invented?
1950s
Who started growth theory?
Robert Solow
What formed the nucleus of modern growth theory?
Solow’s growth model
What did early versions of growth theory say was the reason for some nations being wealthy and some being poor?
Capital
What does the Solow model start with?
Production function
What does a production function for a firm describe?
The relationship between the inputs the firm uses and the output it creates
What is the equation for the production function for a single firm?
q = f(human capital, physical capital)
What does the aggregate production function describe?
The relationship between all the inputs used and the total output of that economy
What does output represent in macro economy?
GDP
What is the equation for the aggregate production function?
Y = F(K,HK,L)
Y = F(K,HK,L)
What does each letter represent?
Y = Output (GDP) F = Function of K = Physical capital HK = Human capital L = Natural resources
What does output depend on?
The resources available for production
What did Solow I focus on?
Capital
Solow I focused on ______ rather than _______
Capital; labor
What is marginal product?
The change in output / The change in input
Explain the marginal product of two ladders
The second ladder will still produce a positive number, but it won’t produce as much as the first did
Is marginal product positive or negative?
Positive
What does diminishing marginal productivity state?
That the marginal product of an input falls as the quantity of the input rises
As capital _______ marginal product _______
Increases or decreases
Increases; Decreases
Sketch the Production function graph
Output increases with capital, but each unit of capital yields less additional output
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
D
What are the two important theoretical implications of the Solow model?
- Steady state
2. Convergence
What is the steady state?
It is the condition of a macro economy when there is no new net investment
What does it mean when an economy reaches the steady state?
Real GDP is no longer increasing and economic growth stops
What is depreciation?
It is a fall in the value of a resource over time
What is net investment?
Investment - deprecation
Does net investment need to be positive or negative in order to increase capital stock?
Positive
What is convergence?
It is the idea that per capita GDP levels across nations will equalize as nations approach the steady state
What do the following focus on?
- Solow I
- Solow II
- Modern Growth Theory
- Capital
- Technology
- Institutions
The original Solow model focused on what as the main source of economic growth? A. labor B. education C. capital D. effective government
C
Sketch the Solow II graph
See notes
What is the Solow II equation?
Y = A x F(physical capital, human capital, natural resources)
In the Solow II equation what does the A stand for?
Technological change
What does new technology mean for output and why?
It means that output will be higher because capital is more productive
What does the Solow II model assume about technological change?
That it’s random
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.
C
What is Exogenous growth?
It is growth that is independent of any factors in the economy (It is random)
What are the two reasons for the Solow growth model’s assumption that technological advances are a matter of pure luck?
- Technological progress often is lucky & random
2. It made the theoretical model easier to solve
What do the policy implication of the Solow growth model say wealth comes from?
Capital and technology
What is Endogenous growth?
It is growth driven by factors inside the economy
What does modern growth theory seek to understand?
Why innovations occur in one place and not the other
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.
A
What are institutions?
They are significant practices, relationships, or organizations in society that frame the incentive structure within which individuals and business firms act
What frames the environment within which production takes place?
Institutions
What is the equation for the modern growth theory?
Y = A x F (physical capital, human capital, natural resources, institutions)
Sketch the modern growth theory graph
See notes
What does the modern growth theory build on?
The solow growth model
What is voluntary investment?
The ability to evaluate
When does voluntary investment occur?
When expected payoffs are greater than costs
Why do we call them expected payoffs?
They come later than the costs and are uncertain
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.
C
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
A. The Solow model
B. Both
C. Neither
D. Modern growth theory
How do macroeconomic theories evolve?
They evolve in relationship to observation of the real world
What is the solow growth model?
It is a model of economic growth based on a production function for the economy
How does technology affect growth?
Technology is a sources of sustained economic growth
Why are institutions the key to economic growth?
They determine incentives for production and can lead to endogenous growth
