Chapter 25 Flashcards

1
Q

Economic growth

A

a sustained expansion of production possibilities.

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2
Q

The economic growth rate

A

the percentage change of real GDP.

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3
Q

Growth rate of real GDP equation

A

(current-previous)/(previous) X 100

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4
Q

The standard of living is

A

less dependent on GDP as a whole and more dependent upon GDP per person.

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5
Q

Real GDP per person (per capita)

A

the real GDP divided by the population.

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6
Q

The Rule of 70 highlights

A

the importance of sustained economic growth and provides a formula for determining the number of years it takes for the level of any variable to double.

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7
Q

The Rule of 70 Equation

A

(70)/(growth rate) = years to double

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8
Q

To understand what determines the growth rate of real GDP, we must understand

A

what determines the growth rates of the factors of production and rate of increase in their productivity.

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9
Q

Real GDP growth contributes to

A

improving our standard of living.

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10
Q

Our standard of living improves only if we

A

produce more goods and services with each hour of labor.

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11
Q

Our main concern is to understand what makes

A

labor more productive.

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12
Q

Labor productivity is

A

the quantity of real GDP produced by one hour of labor.

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13
Q

Labor Productivity Equation

A

(Real GDP)/(Agregate Hours)

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14
Q

When labor productivity grows, real GDP per person

A

grows.

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15
Q

The growth in labor productivity is the basis of the

A

rising standard of living.

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16
Q

Two broad influences on Labor Productivity

A

Saving and investment in physical capital; Expansion of human capital and discovery of new technologies

17
Q

If we added an infinite amount of capital, we would ____ due to the notion that Capital is subject to the law of diminishing marginal returns.

A

not see infinite growth in our productivity.

18
Q

Capital is subject to

A

the law of diminishing marginal returns

19
Q

law of diminishing marginal returns which states that

A

if the quantity of an input is small, an increase in that input generates a large increase in its output. Conversely if the quantity of an input is large, an increase in that input generates a small increase in its output.

20
Q

If capital per hour of labor keeps increasing, labor productivity

A

increases by ever smaller amounts and eventually stops rising.

21
Q

Human Capital

A

the accumulated skill and knowledge of people

22
Q

Expansion of Human Capital comes from what three sources?

A

Education and Training; Job Experience; Health and diet

23
Q

Growth theory starts with

A

wanting a higher standard of living

24
Q

Economic Freedom

A

a condition in which people are able to make personal choices, their property is protected by the rule of law, and they are free to buy and sell in markets

25
Property Rights
the social arrangements that govern the protection of private property.
26
Free markets
allow buyers and sellers to receive signals about prices that create incentives to decrease or increase quantity supplied and demanded
27
Policies to Achieve Faster Growth
Create incentive mechanisms; Encourage saving; Encourage research and development; Encourage international trade; Improve the quality of education
28
Cobb Douglas Production Function
a functional form of the production function that represents the effectiveness of inputs, labor, capital, and total factor productivity, on total output (total production)
29
Cobb Douglas Production Function Equation
Y=AL^B x K^A Y = Total production ( the real value of goods and services produced in a year) L = Labor input ( the total number of hours worked in a year) K = capital input (the real value of all machinery, equipment, and buildings) A = total factor productivity
30
α and β are the _ | α + β= _
output elasticities of capital and labor, respectively. | A+B=1