Chapter 7 - Economic Growth

Question 1

Modern economic growth

Answer 1

Period of economic growth within the last two centuries

Question 2

Industrial Revolution

Answer 2

Widespread use of power-driven machinery and the economic and social changes that happened in the first half of the 1800s

Question 3

Rule of law

Answer 3

Enacting laws for private property rights. Laws must be clear, fair, enforced, public, and applicable to all citizens

Question 4

Contractual rights

Answer 4

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

Question 5

Property rights

Answer 5

Right to own property and use it as one sees fit

Question 6

Labour productivity

Answer 6

Value of goods that each employee creates

Question 7

3 determinants of labour productivity

Answer 7

Human capital, technological change (innovation and invention), and economies of scale

Question 8

Human capital

Answer 8

Knowledge, expertise, and skills the average worker possesses

Question 9

Technological change

Answer 9

Invention, which is advances in knowledge, and innovation, which is putting that advance to use in a new product or service

Question 10

Economies of scale

Answer 10

Cost advantages that industries obtain due to size

Question 11

Production function

Answer 11

Process of turning things like labor, machinery, and raw materials into goods and services

Question 12

Aggregate production function

Answer 12

Process where an economy turns things like human capital, physical capital, and technology into output measured as GDP per capita

Question 13

2 aggregate production functions

Answer 13

GDP = workforce + human capital + physical capital + technology
GDP per capita = human capital per person + physical capital per person + technology per person

Question 14

Future GDP equation

Answer 14

GDP at starting date × (1 + growth rate of GDP)^years = GDP at end date

Question 15

Compound growth rate

Answer 15

Rate of growth when multiplied by a base that includes past GDP growth

Question 16

Physical capital

Answer 16

Plant and equipment used in production (includes infrastructure)

Question 17

Capital deepening

Answer 17

When society increases the level of capital per person

Question 18

Recipe for economic growth

Answer 18

Investing in labor productivity, investments in human capital and technology, and increasing physical capital

Question 19

4 areas that governments around the world have chosen to invest in to facilitate capital deepening and technology

Answer 19

Education, savings and investments, special economic zones, and scientific research

Question 20

Special economic zones (SEZ)

Answer 20

Areas, typically with a port, where the government does not tax trade

Question 21

Convergence

Answer 21

When low-income economies grow faster than those of high-income countries

Question 22

Arguments favouring convergence

Answer 22

1. 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
2. Low-income countries may find it easier to improve their technologies than high-income countries
3. Countries have observed the experience of those that have grown more quickly and have learned from it

Question 23

Arguments that convergence is not inevitable nor likely

Answer 23

1. New technology can allow an economy to sidestep the diminishing marginal returns of capital deepening
2. Good performance when adapting and using new is not necessarily guaranteed
3. In the last two centuries, improvements in technology have not run into diminishing marginal returns