Chapter 7

Question 1

Define productivity

Answer 1

the quantity of goods and services produced from each hour of a worker’s time (key determinant of living standards)

Question 2

What are the 4 determinants of productivity?

Answer 2

• physical capital
• human capital
• natural resources
• technological knowledge

Question 3

Define physical capital

Answer 3

equipment and structures that are used to produce goods and services

Question 4

Define human capital

Answer 4

knowledge and skills that workers acquire through education, training, and experience (school, training)

Question 5

Define natural resources

Answer 5

inputs into the production of goods and services that are provided by natures (land, rivers, mineral deposits)

Question 6

Define technological knowledge

Answer 6

society’s understanding of the best ways to produce goods and services (common knowledge- discovered by one, everyone knows; proprietary- only known by company that discovers it)

Question 7

What are the 9 ways government policy can raise productivity and living standards in a country?

Answer 7

1. saving and investment
2. diminishing returns and the catch up effect
3. investment from abroad
4. education
5. health and nutrition
6. property rights and political stability
7. free trade
8. research and development
9. population growth

Question 8

What are diminishing returns?

Answer 8

the benefit of from an extra unit of input declines as the quantity of the input increases - benefits from additional capital become smaller over time

Question 9

What are diminishing returns?

Answer 9

the benefit of from an extra unit of input declines as the quantity of the input increases - benefits from additional capital become smaller over time

Question 10

What is the catch-up effect?

Answer 10

countries that start off poor tend to grow more rapidly than countries that start off rich

Question 11

What is foreign portfolio investment?

Answer 11

investment financed with foreign money but operated by domestic residents

Question 12

What is foreign direct investment?

Answer 12

owned & operated by a foreign entity

Question 13

What is the brain drain?

Answer 13

the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living

Question 14

What are property rights?

Answer 14

the ability of people to exercise authority over resources they own - company will not put money into mining if they expect their equipment to be stolen or they will not make a profit

Question 15

What are inward oriented policies?

Answer 15

policies aimed at raising productivity and living standards within a country by avoiding interaction with the rest of the world - protection from foreign competition

Question 16

What are inward oriented policies?

Answer 16

policies aimed at raising productivity and living standards within a country by avoiding interaction with the rest of the world - protection from foreign competition

Question 17

What is the equation to calculate productivity?

Answer 17

real GDP/ labour employed

Question 18

Q= f (K, L, H, N) 
Q- real GDP 
f- function of 
K- capital 
L- labour
H- knowledge
N- natural resources

Answer 18

.