Chapter 21

Question 1

What is economic growth?

Answer 1

increase in GDP per capita of an economy

Question 2

What is the growth rate?

Answer 2

change in a quantity, betweeen to dates, realtive to the baseline quantity.

Growth t, t+1= (Yt+1-Yt)/Yt

Question 3

What is exponential growth?

Answer 3

process by which a quantity grows at an aproximately constant growth rate

Question 4

What is catch-up growth?

Answer 4

process whereby relatively poorer nations increase their incomes by taking advantage of knowledge and technologies already invented in other, more technologically advanced countries (they also increase their saving, efficiency units of labor and production)

Question 5

What is sustained growth?

Answer 5

process whereby real GDP per capita grows at a positive and relatively steady state for long periods of time

Question 6

What is the aggregate production function?

Answer 6

Y= A * F(K,H)

K-physical capital (can be increased by investment)
H-efficiency units of labor
A-level of technology (technological progress, efficiency of production)

Question 7

What are savings?

Answer 7

Saving= consumption in the future

Question 8

How are higher savings encouraged?

Answer 8

Higher R encourage more saving

Question 9

saving rate

Answer 9

the saving rate designates the fraction of income that is saved

Saving rate= Total saving/GDP

Question 10

Can physical capital accumulation generate sustained growth?

Answer 10

Physical capital accumulation by itself cannot generate sustained- growth due to diminishing marginal product of physical capital.

• Inefficient to explain sustained, growth
• More and more K will translate into less and less increase in GDP

Also due to diminishing marginal product of labor, every additional worker will increase real GDP by less and less (neither schooling because workers have a finite life)

Question 11

technological chanfe

Answer 11

. technological change is the process of new technologies and new GS being invented, introduced and used in the economy, enabling the economy to achieve a higher level of real GDP for given levels of physical capital stock and total efficiency units of labor.

Technological change is exponential.

-Inventores do not start from scratch : they build on the knowledge stock resulting from past innovations.

~ increases productive capacity by a constant proportional amount
( + constant amount )

-Improvements in technology appear to be the most plausible engine of sustained growth.

~ before 1800, the pace of technological change was much slower, almost stagnant.

Question 12

subsistence level

Answer 12

The subsistence level is the minimum level of income per person that is generally necessary for the individual to obtain enough calories, shelter, and clothing to survive.

Question 13

Malthusian Limits to Growth

Answer 13

Fertility refers to the number of children per adult or per woman of child beaning age.
~fertility would adjust so that income always would remain close to a subsistence level.
~when standar do rise, couples will have more children.
~real GDP could not grow faster than population ( increasing pop ) ( bellow subsistence l. ) would push GDP down )=) fall in GDP would trigger wars and famines and kill a large fraction of the population.
-A lower population than would cause GDP to increase again. (due to pressure on resources)
-the switch from -one-child policy to two child-policy can reduce the long run income per capita in China

There are two key assumptions in the Malthusian theory. First, population growth responds positively to GDP per capita. Second, fixed factors such as land are essential in the production function as Malthus is focusing on agriculture production.

tagnation refers to the fact that GDP per capita is constant.

Malthus theory: suppose GDP per capita rises for some exogenous reason (e.g. because of a famine and population drops), the income is now above subsistence level, people get married earlier or have more children. This implies a rise in population which causes GDP per capita to drop and return to the subsistence level.

In Malthusian theory, there will be a short run increase in income per capita (which proxies living standard). In the long run, population will increase, which offsets the positive effect of an increase in technology. Income per capital returns to the previous level, thus long run living standard is not affected.

Question 14

Malthusian cycle

Answer 14

The Malthusian cycle refers to the pre-industrial pattern in which increases in aggregate income lead to an expanding population, which in turn reduces income per capita and ultimately puts downward pressure on the population.

Question 15

demographic transition

Answer 15

demographic transition refers to the decline in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. ( incentive for smaller families )

-The number of children per family would adjust so that income would remain
close to a subsistence level.

Question 16

industrial revolution

Answer 16

The industrial revolution denotes the series of innovations and their implementation in the production process that began at the end of the 18th century in Britain.
-opened the way for more steady and rapid technological changes that underpinned modern economic growth.
~ changes in technology started with the industrial revolution.

Question 17

3 building blocks the solow growth model

Answer 17

3 building blocks:
aggregate production function equation for physical capital accumulation (subject to depreciation)

~ depreciation can be slowed or reversed by continal investment.

-implies I=d*K (depreciated value of K)

Question 18

What is the steady-state eqm ?

Answer 18

What is the steady-state eqm is an economic eqm in which K remains constant over time

Question 19

What are recommended to foster sustained growth?

Answer 19

-R&D

The followings DO NOT foster sustained growth:

• encouraging private savings
• Encouraging consumption of domestic goods
• Encouraging education

In the short run, when the economy is below the steady state, an increase in capital increases output which increases total saving which is a fixed fraction of output. Since saving is equal to gross investment, capital stock increases when gross investment is higher than depreciation of capital, so future stock of capital increases. This process stops at some point due to diminishing marginal product of capital, thus the economy reaches a steady state where economic growth is zero.

In the Solow growth model, an increase in technology shifts up the saving curve. This increases the marginal product of capital for a given level of capital (growth rate increases in the short run) and increases the steady state level of capital. Income per capita increases both in the short run and in the long run

Question 20

According to Solow how does capital accumulate in the productive process?

Answer 20

Through households’ savings

Students should write down the capital accumulation equation and the graph for Solow model that shows the long run steady state.

Question 21

Can we tell from saving percentage and depreciating percentage rate, what will happen to output this year?

Answer 21

NO! we cannot tell

Question 22

Why does output growth slow down in the Solow model?

Answer 22

• Because the amount saved becomes less productive
• Because the amount saved increases at a slower rate
• Because of diminishing marginal product of capital

Question 23

How is the steady state level of output defined in the Solow model?

Answer 23

aggregate investment = aggregate depreciation

Question 24

Which of the following might affect the steady state level of output in the Solow
model?

Answer 24

B. A change in people’s preferences for consumption
D. Capital depreciating at a higher rate

NOT THIS:

• An earthquake that destroys available machinery
• Foreign aid

Question 25

Is unemployment and real consumption counter cyclical?

Answer 25

NO.