Chapter 7 (Textbook Information) Flashcards
In a market economy, scarcity is reflected in _____ _____.
In a market economy, scarcity is reflected in MARKET PRICES.
a) What is happening to the prices of most natural resources (adjusted for overall inflation)?
b) What does this mean?
a) The prices of most natural resources (adjusted for overall inflations) are stable or falling
b) Our ability to conserve natural resources is growing more rapidly than our supplies are dwindling (market prices give us no reason to believe that natural resources are limiting economic growth).
What does a society’s standard of living depend on?
Its ability to produce goods and services
What does a society’s productivity depend upon? (five factors)
1) Technology (A)
2) Workers (L)
3) Physical Capital (K)
4) Natural Resources (N)
5) Human Capital (H)
What is one way to raise future productivity?
Invest more current resources in the production of capital
What must happen in order for a society to invest more in capital?
Society must consume less and save more of its current income
What ultimately caused the financial crisis of 2007 to 2009?
People and firms lost faith in the transparency of financial markets
In the opinion of many economists, what ensured recovery from the financial crisis of 2007 to 2009?
Dramatic public policy responses
Since the crisis of 2007 to 2009, what have economists paid closer attention to?
The design of financial institutions and the regulations that guide them
What are two important ways that a government can encourage economic growth and, in the long run, raise the economy’s standard of living?
1) Encourage saving and investment
2) Maintain well-functioning and carefully regulated financial markets (in a transparent way)
Saving rate
Percentage of GDP devoted to saving rather than consumption
What are three direct results of a nation saving more?
1) Fewer resources are needed to make consumption goods
2) More resources are available to make capital goods
3) Capital stock increases
What are two results from an increase in capital stock lead to?
1) Rising productivity
2) More rapid growth in GDP
The traditional view of the production process is that capital is subject to _____ _____.
The traditional view of the production process is that capital is subject to DIMINISHING RETURNS.
Diminishing returns
The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
a) Assuming that the saving rate remains at its new higher level, does the growth rate of GDP stay high indefinitely or only for a period of time?
b) Why?
a) Only for a while
b) Because of diminishing returns as the higher saving rate allows more capital to be accumulated, the benefits from additional capital become smaller over time, and so growth slows down.
In the long run, the higher saving rate leads to a _____ level of productivity and income,
but NOT to _____ growth in these variables.
In the long run, the higher saving rate leads to a HIGHER level of
productivity and income, but NOT to HIGHER growth in these variables.
Other things equal, it is easier for a country to grow fast if it starts out relatively _____.
Other things equal, it is easier for a country to grow fast if it starts out relatively POOR.
Catch-up effect
The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
What are two ways to increase a country’s saving rate / invest in new capital?
1) Saving by domestic residents
2) Investment by foreigners
Foreign direct investment
Capital investment that is owned and operated by a foreign entity
i.e. A Canadian company building a plant to assemble airplanes in Ireland
Foreign portfolio investment
An investment that is financed with foreign money but operated by domestic residents
i.e. A Canadian company buying stocks in an Irish corporation; the Irish corporation using the proceeds from the stock sale to build a new factory
Why do foreigners invest in a country?
Because they expect to earn a return to their investment
Foreign investment raises income of a country’s citizens _____ than it raises the production of the country.
Foreign investment raises income of a country’s citizens LESS than it raises the production of the country.
What are two reasons economists who advise governments in less-developed economies advocate policies that encourage investment from abroad?
1) Investment increases the economy’s stock of capital which leads to higher productivity and wages
2) One way for poor countries to learn the state-of-the-art technologies developed and used in rich countries
When governments in less-developed economies implement policies that encourage investment from abroad, what do they also often have to do?
Remove restrictions imposed on foreign ownership of domestic capital
What organization tries to encourage the flow of capital to poor countries?
World Bank
What are two roles of the World Bank?
1) Obtain funds from the world’s advanced countries and uses these resources to make loans to less-developed countries so that they can invest in roads, sewer systems, schools, and other types of capital
2) Offer countries advice on how the aforementioned funds might best be used
When was the World Bank and the IMF (its sister organization) formed?
After World War II
Why does every country have an interest in promoting economic prosperity around the world?
Economic distress often leads to political turmoil, international tensions, and military conflict
What is the common goal of the World Bank and the IMF?
Promoting economic prosperity around the world
In Canada, each year of schooling has historically raised a person’s wage on average by about __%
In Canada, each year of schooling has historically raised a person’s wage on average by about 10%
Why do some economists argue that human capital is particularly important for economic growth?
Because human capital conveys positive externalities
i.e. An educated person, for instance, might generate new ideas about how to produce goods and services
Externality
Effect of one person’s actions on the well-being of a bystander
Brain drain
The emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living
What are three reactions analysts have suggested to the brain drain of workers from Canada to the United States?
1) Cut taxes in order to make the after-tax incomes of skilled workers more comparable to those in the United States
2) Improve Canada’s social programs as well as invest in better education and improved health care
3) Some analysts are not convinced the brain drain to the US is so large as to justify any responses at all
What is a type of investment in people (besides education) that human capital can refer to?
Expenditures that lead to a healthier population
What does economic historian Robert Fogel suggest is a significant factor in economic growth?
Improved health from better nutrition
According to Fogel’s studies, what is an indicator of malnutrition?
Short height, especially during pregnancy and early years of life
What three areas of economic history research was Fogel awarded the Nobel Prize in Economic Sciences in 1993 for?
1) Nutrition and economic growth
2) American slavery
3) The role of railroads in the development of the American economy
Policymakers can foster economic growth by protecting _____ rights and promoting _____ stability.
Policymakers can foster economic growth by protecting PROPERTY rights and promoting POLITICAL stability.
Property rights
The ability of people to exercise authority over the resources they own
Why do courts serve an important role in a market economy?
They enforce property rights
i.e. Through the criminal justice system, the courts discourage direct theft
What is one threat to property rights?
Political instability
Inward-oriented policies
Policies aimed at raising productivity and living standards within the country by avoiding interaction with the rest of the world
Most economists today believe that poor countries are better off pursuing _____ oriented policies that integrate these countries into the world economy.
Most economists today believe that poor countries are better off pursuing OUTWARD oriented policies that integrate these countries into the world economy.
Trade, in some ways, has the same impacts on an economy as _____.
Trade, in some ways, has the same impacts on an economy as TECHNOLOGICAL ADVANCEMENT.
What is an adverse impacts of inward orientation on small, less-developed countries (i.e. Argentina)?
Living standards would fall
They would have to produce all of their own capital goods
What two main factors are the amount that a nation trades with others determined by?
1) Government policy
2) Geography
The critical importance of access to the _____ helps explain why the African continent is so poor.
The critical importance of access to the SEA helps explain why the African continent is so poor.
Fix _____ and you will fix poverty.
Fix INCENTIVES and you will fix poverty.
If you wish to fix institutions, you have to fix _____.
If you wish to fix institutions, you have to fix GOVERNMENTS.
What is the primary reason that living standards are higher today than they were a century ago?
Technological knowledge has advanced
What two parties does most technological advancement come from?
1) Private research by firms
2) Individual inventors
Public good
A good that is both non-excludable and non-rivalrous in that individuals cannot be excluded from use or could be enjoyed without paying for it, and where use by one individual does not reduce availability to others
What are three ways we can help poor nations with corrupt institutions?
1) Our foreign policy should punish repressive regimes through trade embargoes and diplomacy
2) Educating foreign citizens
3) Arming foreign system with modern tools of activism; i.e. the Internet, encryption technology and cell phone platforms that can evade firewalls and censorship
What are three ways the Canadian government encourages research?
1) Research grants
2) Tax breaks to firms that engage in research and development
3) Patent system: The patent gives the inventor a property right over his invention turning their new idea from a public good into a private good (for a specified number of years)
In what two ways is productivity reflected?
1) Real wages
2) Family incomes
What causes productivity to fall / grow?
Changes in input prices
What caused a significant fall in productivity in 2008 and 2009?
Sharp rise in the price of financial transactions…
The collapse and near-collapse of a number of major lending institutions around the world forced financial institutions to change their lending practices and in so doing forced many firms to rely
far less on financial capital to produce their products than they had previously
What is the normal rate of technological progress in Canada (as determined between 1921 and 2014)?
2% per year
What is the most direct effect of population growth on a society?
Size of the labor force: A large population means more workers to produce goods and services
Why might a large population not mean a higher standard of living for the typical citizen?
A large population means more people to consume goods and services
What did Thomas Robert Malthus argue?
An ever-increasing population would continually strain society’s ability to provide for itself; mankind was doomed forever to live in poverty
According to Malthus, why are attempts by charities or governments to alleviate poverty counterproductive?
Allowed the poor to have more children placing even greater strains on society’s productive capabilities
Where did Malthus’s theory go wrong?
He did not account for technological advancements
Some modern theories of economic growth emphasize the effects of population on _____ _____.
Some modern theories of economic growth emphasize the effects of population on CAPITAL ACCUMULATION.
According to some modern theories, how does population growth dilute capital stock?
Population growth means a smaller quantity of capital per worker which leads to lower productivity and lower GDP per worker
In what case is the dilution of capital stock the most apparent?
In the case of human capital: countries with high population growth have large numbers of school-age children thus placing a larger burden on the educational system
Some analysts believe that _____ the rate of population growth would help less-developed countries raise their standards of living.
Some analysts believe that REDUCING the rate of population growth would help less-developed countries raise their standards of living.
What has been the population growth rate of developed countries such as Canada, the United States, and Western Europe in recent decades?
About 1% per year (which is below the rate necessary to maintain population at current levels)
Why are policymakers worried about the population growth rate in developed countries such as Canada, the United States, and Western Europe?
The current population growth rate would lead to a shrinking population of working-age people
unable to maintain economic growth rates.
The result may be tax revenue that is insufficient to support a growing share of the population that is retired and the expected public services.
What is one way governments can reduce the rate of population growth? (Hint: incentives)
Implementing policies that foster equal treatment of women: Women with the opportunity to receive a good education and desirable employment tend to want fewer children than those with fewer opportunities outside the home
What was Michael Kremer’s hypothesis?
Having more people induces more technological progress
What two pieces of evidence supported Michael Kremer’s hypothesis?
1) Over the broad span of human history, world growth rates have increased as world population has
2) The most successful region of the world in 1500 was the most populated region and, the least successful, was the most isolated region
What are 7 ways government policies can try to influence the economy’s growth rate?
1) Encourage saving and investment
2) Encourage investment from abroad
3) Foster education
4) Maintain property rights and political stability
5) Allow free trade
6) Promote the research and development of new technologies
7) Control population growth
