Chapter 7 - Economic Growth Flashcards
Modern economic growth
Period of economic growth within the last two centuries
Industrial Revolution
Widespread use of power-driven machinery and the economic and social changes that happened in the first half of the 1800s
Rule of law
Enacting laws for private property rights. Laws must be clear, fair, enforced, public, and applicable to all citizens
Contractual rights
Rights of people to create agreements with others on use of their property which can result in the legal system being involved in the event of noncompliance
Property rights
Right to own property and use it as one sees fit
Labour productivity
Value of goods that each employee creates
3 determinants of labour productivity
Human capital, technological change (innovation and invention), and economies of scale
Human capital
Knowledge, expertise, and skills the average worker possesses
Technological change
Invention, which is advances in knowledge, and innovation, which is putting that advance to use in a new product or service
Economies of scale
Cost advantages that industries obtain due to size
Production function
Process of turning things like labor, machinery, and raw materials into goods and services
Aggregate production function
Process where an economy turns things like human capital, physical capital, and technology into output measured as GDP per capita
2 aggregate production functions
GDP = workforce + human capital + physical capital + technology
GDP per capita = human capital per person + physical capital per person + technology per person
Future GDP equation
GDP at starting date × (1 + growth rate of GDP)^years = GDP at end date
Compound growth rate
Rate of growth when multiplied by a base that includes past GDP growth
Physical capital
Plant and equipment used in production (includes infrastructure)
Capital deepening
When society increases the level of capital per person
Recipe for economic growth
Investing in labor productivity, investments in human capital and technology, and increasing physical capital
4 areas that governments around the world have chosen to invest in to facilitate capital deepening and technology
Education, savings and investments, special economic zones, and scientific research
Special economic zones (SEZ)
Areas, typically with a port, where the government does not tax trade
Convergence
When low-income economies grow faster than those of high-income countries
Arguments favouring convergence
- Law of diminishing returns suggests that as an economy continues to increase its human and physical capital, the marginal gains to economic growth will diminish
- Low-income countries may find it easier to improve their technologies than high-income countries
- Countries have observed the experience of those that have grown more quickly and have learned from it
Arguments that convergence is not inevitable nor likely
- New technology can allow an economy to sidestep the diminishing marginal returns of capital deepening
- Good performance when adapting and using new is not necessarily guaranteed
- In the last two centuries, improvements in technology have not run into diminishing marginal returns
