Chapter 25 Flashcards
Economic growth
a sustained expansion of production possibilities.
The economic growth rate
the percentage change of real GDP.
Growth rate of real GDP equation
(current-previous)/(previous) X 100
The standard of living is
less dependent on GDP as a whole and more dependent upon GDP per person.
Real GDP per person (per capita)
the real GDP divided by the population.
The Rule of 70 highlights
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.
The Rule of 70 Equation
(70)/(growth rate) = years to double
To understand what determines the growth rate of real GDP, we must understand
what determines the growth rates of the factors of production and rate of increase in their productivity.
Real GDP growth contributes to
improving our standard of living.
Our standard of living improves only if we
produce more goods and services with each hour of labor.
Our main concern is to understand what makes
labor more productive.
Labor productivity is
the quantity of real GDP produced by one hour of labor.
Labor Productivity Equation
(Real GDP)/(Agregate Hours)
When labor productivity grows, real GDP per person
grows.
The growth in labor productivity is the basis of the
rising standard of living.
Two broad influences on Labor Productivity
Saving and investment in physical capital; Expansion of human capital and discovery of new technologies
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.
not see infinite growth in our productivity.
Capital is subject to
the law of diminishing marginal returns
law of diminishing marginal returns which states that
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.
If capital per hour of labor keeps increasing, labor productivity
increases by ever smaller amounts and eventually stops rising.
Human Capital
the accumulated skill and knowledge of people
Expansion of Human Capital comes from what three sources?
Education and Training; Job Experience; Health and diet
Growth theory starts with
wanting a higher standard of living
Economic Freedom
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
Property Rights
the social arrangements that govern the protection of private property.
Free markets
allow buyers and sellers to receive signals about prices that create incentives to decrease or increase quantity supplied and demanded
Policies to Achieve Faster Growth
Create incentive mechanisms; Encourage saving; Encourage research and development; Encourage international trade; Improve the quality of education
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)
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
α and β are the _
α + β= _
output elasticities of capital and labor, respectively.
A+B=1
