Chapter 7: Economic Growth

Question 1

Property Rights

Answer 1

The rights of individuals and firms to own property and use it as they see fit

Question 2

Contractual Rights

Answer 2

Based on property rights, allowing individuals to enter into agreements with others regarding use of their property providing recourse through the legal system in event of noncompliance

Question 3

Why do property rights and contractual rights matter to economic growth?

Answer 3

The ability for individuals to use their property to their fullest ability, including the right to trade or sell, results in economic growth. The legal system enforces contracts, making people more likely to enter into transactions, resulting in economic growth.

Question 4

Labor Productivity

Answer 4

Value that each employed person creates per unit of his or her input

Question 5

Human Capital

Answer 5

Accumulated knowledge from education and experience, skills, and expertise that the average worker in an economy possesses

Question 6

Factors that Determine Labor Productivity (3)

Answer 6

1. Human Capital
2. Technological Change
3. Economies of Scale

Question 7

Technological Change

Answer 7

Invention (advances in knowledge) and innovation (implantation of new product or service). Can include new methods or ways of organizing work (ie assembly line)

Question 8

Economies of Scale

Answer 8

Cost advantages that industries obtain due to size

Question 9

GDP Future Growth Rate Calculation

Answer 9

GDP @ Start Date x ((1+ Growth Rate of GDP)^# of years) = GDP @ End Date

Question 10

Physical Capital

Answer 10

Land, factories, equipment, roads, etc. Increase in either quality or quantity of physical capital implies more output/growth.

Question 11

Capital Deepening

Answer 11

Society increases the level of capital (human capital or physical capital) per person

Question 12

Argument that World Economies will Converge

Answer 12

1. Law of diminishing returns

2. The advantage of backwardness (faster growth rates, ability to adopt new technologies developed in leader countries)

Question 13

Argument that World Economies will not Converge

Answer 13

1. Technological innovations offset the law of diminishing returns for human & physical capital. Technology finds new and efficient ways to use same amounts of capital.

Question 14

Rule of 72

Answer 14

Approximation to figure out doubling time (72/6% growth rate = 12 years for income to double)