Chapter 7

Question 1

What is productivity? Why is it important?

Answer 1

Productivity is the quantity of goods and services produced from each hour of a worker’s time. It is the primary determinant of a country’s standard of living.

Question 2

What is the formula for productivity?

Answer 2

Productivity = Real GDP (Y) / Quantity of Labour (L)

Question 3

What are the four determinants of productivity?

Answer 3

1. Physical Capital (K): Stock of equipment and structures used in production.
2. Human Capital (H): Knowledge and skills workers acquire through education, training, and experience.
3. Natural Resources (N): Inputs from nature, such as land and minerals.
4. Technological Knowledge (A): Society’s understanding of the best ways to produce goods and services.

Question 4

What is the production function?

Answer 4

Y = A ⋅ F(L, K, H, N)
Where:
Y: Output
A: Technology
L: Labour
K: Physical capital
H: Human capital
N: Natural resources

Question 5

What are constant returns to scale in the production function?

Answer 5

If all inputs are scaled by a factor, output scales by the same factor. For example, doubling all inputs doubles output: 2Y = A ⋅ F(2L, 2K, 2H, 2N)

Question 6

What is the rule of 70? How is it used?

Answer 6

The rule of 70 estimates the number of years it takes for a variable to double: Years to Double = 70 / Annual Growth Rate (%)

Question 7

Explain diminishing returns and its impact on growth.

Answer 7

Diminishing returns occur when the benefit from an additional unit of input decreases as the quantity of input increases. This leads to slower growth over time.

Question 8

What is the catch-up effect?

Answer 8

Poor countries tend to grow more rapidly than rich ones because additional capital increases productivity significantly when initial capital levels are low.

Question 9

What are foreign direct investment and foreign portfolio investment?

Answer 9

Foreign Direct Investment (FDI): Capital investment owned and operated by a foreign entity.
Foreign Portfolio Investment: Investment financed by foreign money but operated by domestic residents.

Question 10

How does saving and investment affect economic growth?

Answer 10

Higher saving leads to more resources being allocated to capital goods, increasing productivity and growth in the short run.

Question 11

What is the opportunity cost of investing in capital?

Answer 11

Reduced consumption today to increase future productivity and income.

Question 12

How does education contribute to economic growth?

Answer 12

Education increases human capital, which improves productivity and raises wages.

Question 13

What is the relationship between health and productivity?

Answer 13

Healthier workers are more productive. Improved health leads to higher incomes, creating a virtuous cycle of growth.

Question 14

Why are property rights and political stability crucial for economic growth?

Answer 14

Secure property rights encourage investment. Political stability ensures predictable policies and reduces risks for investors.

Question 15

What is the role of free trade in economic growth?

Answer 15

Free trade allows countries to specialize in their strengths, increasing efficiency and expanding production possibilities.

Question 16

What is Malthusian theory? Why is it criticized?

Answer 16

Malthus predicted that population growth would outstrip food production, leading to poverty. Critics argue technological progress and innovation have disproven this.

Question 17

How does population growth interact with productivity?

Answer 17

Negative Effects: High population growth can dilute capital stock per worker, reducing productivity.
Positive Effects: Larger populations lead to more innovation and technological progress.

Question 18

How do you calculate future GDP given growth rates?

Answer 18

GDP future = GDP current ⋅ (1 + g)^t
Where g is the growth rate and t is the number of years.

Question 19

What are examples of public policies to encourage growth?

Answer 19

1. Encourage saving and investment.
2. Promote education and training.
3. Strengthen property rights and political stability.
4. Encourage free trade.
5. Support research and development.

Question 20

What does a nation’s GDP measure?

Answer 20

Total income earned in the economy.
Total expenditure on the economy’s output of goods and services.

Question 21

What does the growth rate of GDP measure?

Answer 21

The percentage change in GDP over a period of time.

Question 22

What is the relationship between GDP and standard of living?

Answer 22

High GDP = high economic prosperity.
Growth in GDP = economic progress over time.

Question 23

Define the brain drain.

Answer 23

The emigration of highly educated workers to richer countries, reducing human capital in their home country.

Question 24

How does health impact productivity?

Answer 24

Healthier workers are more productive, creating a cycle of improved income and better health outcomes.

Question 25

Why are property rights crucial for growth?

Answer 25

They ensure security for investment and production, fostering economic stability.

Question 26

What is the difference between inward-oriented and outward-oriented policies?

Answer 26

Inward-oriented: Focus on self-sufficiency, protecting domestic industries.
Outward-oriented: Emphasize international trade to enhance growth.

Question 27

What is the importance of research and development (R&D) in growth?

Answer 27

R&D drives technological progress. Knowledge is a public good, benefiting society.

Question 28

What are the two types of capital investment?

Answer 28

1. Private Investment: Household and firm investments in physical or human capital.
2. Government Investment: Infrastructure, education, and health initiatives.

Question 29

What is the formula for output per worker in terms of inputs?

Answer 29

Y / L = A ⋅ F(1, K / L, H / L, N / L)

Question 30

What are externalities in the context of education?

Answer 30

Benefits of education that extend beyond the individual, improving societal productivity.

Question 31

What is the relationship between technological knowledge and human capital?

Answer 31

Technological Knowledge: Society-wide innovations and production methods.
Human Capital: Skills and expertise of individuals.