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Macro > Chapter 8: Economic Growth > Flashcards

Chapter 8: Economic Growth Flashcards

1
Q

What are the two main ways to measure economic growth?

A
  1. An increase in real GDP over some time period.
  2. An increase in real GDP per capita over some time period.
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2
Q

How is the growth rate of real GDP calculated?

A

Growthrate=
(NewRealGDP−OldRealGDP)/(OldRealGDP) ×100

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3
Q

What is the difference between Real GDP and Nominal GDP?

A

Real GDP is adjusted for inflation.
Nominal GDP is not adjusted for inflation.

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4
Q

Why is Real GDP per capita a better measure for comparing living standards?

A

Because it accounts for the population size, giving a more accurate representation of how much each person produces in an economy.

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5
Q

What is the Rule of 70 used for?

A

Yearstodouble

It estimates the number of years it will take for a measure (like GDP) to double based on its annual growth rate.

70/Growthrate

​

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6
Q

How long will it take for GDP to double with a 3% annual growth rate?

A

70/3 = 23years

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7
Q

Why are growth rates important in measuring economic growth?

A

Small changes in the growth rate can have large effects on the economy’s total output.

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8
Q

What does Real GDP per capita not account for when measuring growth?

A

Quality improvements in goods and services.
Increases in leisure time (e.g., shorter workweeks).
Environmental impacts of growth.

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9
Q

What example shows a country where GDP growth was misleading?

A

Eritrea had a real GDP growth rate of 1.3% from 2000-2008, but its population grew at 3.8%, leading to a decline in real GDP per capita.

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10
Q

How does economic growth benefit society?

A
  • Leads to rising wages and income.
  • Helps reduce scarcity and improve living standards.
  • Provides more opportunities for individuals and families
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11
Q

What is the average annual growth rate of Real GDP in the U.S. since 1950?

A

About 3.0% per year.

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12
Q

What is the average annual growth rate of Real GDP per capita in the U.S. since 1950?

A

About 1.9% per year

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13
Q

What are some limitations of GDP as a measure of economic well-being?

A
  • It does not capture the improvement in product quality.
  • It excludes the value of leisure activities.
  • It doesn’t account for environmental impacts or quality of life changes.
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14
Q

What is the key difference between the pre-industrial era and modern economic growth?

A

Before the Industrial Revolution, living standards were relatively constant over long periods, whereas modern economic growth has resulted in sustained increases in material prosperity, improving living standards within a single lifetime.

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15
Q

When did the Industrial Revolution begin, and what invention marked its start?

A

The Industrial Revolution is informally dated to 1776, when James Watt perfected an efficient steam engine that powered steamships, locomotives, and factory equipment.

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16
Q

What were some key technological advancements following the steam engine?

A

Key advancements included electric power, motorized vehicles, telephones, airplanes, computers, and the Internet, all of which significantly changed society.

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17
Q

How did modern economic growth affect cultural, social, and political aspects?

A

Cultural: Increased wealth allowed more leisure and arts.

Social: Abolition of feudalism, universal public education, and more opportunities for women and minorities.

Political: Movement toward democracy

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18
Q

How has the average human lifespan changed since the Industrial Revolution?

A

The average lifespan has more than doubled, from less than 30 years to over 72 years today, reflecting the impact of modern economic growth.

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19
Q

How has modern economic growth spread globally?

A

It began in Britain in the late 1700s, spread to Western Europe and the U.S. by the 1800s, then to Asia and parts of Africa, with Africa experiencing it only in the last 50 years.

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20
Q

What is the GDP disparity between regions today?

A

In 1820, GDP per capita was similar worldwide, but today, the U.S. has a per capita income of $58,480, while Africa’s is $3,532, showing vast differences due to earlier industrialization.

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21
Q

What allows poorer countries to catch up with wealthier ones in terms of economic growth?

A

Poorer countries can adopt existing technologies (like mobile phones in Africa), bypassing stages that wealthier countries had to go through, allowing for faster growth.

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22
Q

Give an example of a country that experienced rapid catch-up growth.

A

South Korea grew at 8.8% annually between 1960 and 2020, transforming from one of the poorest countries to a rich technological leader.

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23
Q

Why do technological frontier countries like China see slower growth?

A

Once near the technological frontier, countries must innovate rather than adopt technology, which slows growth, as seen in China’s recent growth slowdown.

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24
Q

What are the key institutional structures that promote economic growth?

A
  • Strong property rights
  • Patents and copyrights
  • Efficient financial institutions
  • Education and literacy
  • Free trade
  • Competitive market system
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25
Q

How do property rights contribute to economic growth?

A

Property rights ensure that investments are protected, incentivizing people to invest and save, which is crucial for economic growth.

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26
Q

What role do patents and copyrights play in promoting economic growth?

A

They provide inventors and authors with exclusive rights to their creations, encouraging innovation by offering financial incentives.

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27
Q

How do efficient financial institutions support economic growth?

A

Financial institutions like banks and stock markets channel savings to businesses and entrepreneurs, supporting investment and technological advancement.

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28
Q

Why is education and literacy important for economic growth?

A

A highly educated workforce is essential for developing and utilizing new technologies that drive productivity and innovation.

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29
Q

How does free trade contribute to economic growth?

A

Free trade allows countries to specialize in producing goods at the lowest opportunity cost and spreads new ideas quickly, boosting efficiency and innovation.

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30
Q

What is the role of a competitive market system in economic growth?

A

A competitive market system allows firms to respond to price signals and invest in technologies that improve productivity and drive growth.

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31
Q

How does the overall social, cultural, and political environment impact economic growth?

A

A stable political system, the protection of property rights, a culture that values innovation, and a positive attitude toward work and risk-taking all promote economic growth.

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32
Q

How do patents influence innovation in developing countries, using India as an example?

A

India’s weak patent protections allowed local companies to copy drugs from the U.S. and sell them cheaply. Recently, India strengthened patent protections to incentivize local innovation, despite higher drug prices for consumers.

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33
Q

What is the main takeaway from the global disparity in economic growth and standards of living?

A

Modern economic growth has been uneven, with some countries experiencing growth for much longer than others, leading to large differences in living standards today. However, poorer countries can still catch up by adopting advanced technologies.

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34
Q

What are the six key factors that affect the rate and quality of economic growth?

A

The six factors are four supply factors, one demand factor, and one efficiency factor.

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35
Q

What are the four supply factors that affect economic growth?

A
  1. Increases in the quantity and quality of natural resources
  2. Increases in the quantity and quality of human resources
  3. Increases in the supply of capital goods
  4. Improvements in technology
36
Q

What is the demand factor in economic growth?

A

The demand factor refers to the need for increased spending by households, businesses, and government to fully realize the higher production potential created by the supply factors.

37
Q

What is the efficiency factor in economic growth?

A

The efficiency factor emphasizes the need for economic efficiency to maximize well-being. This includes productive efficiency (using resources in the least costly way) and allocative efficiency (producing the optimal mix of goods to maximize utility).

38
Q

How are the supply, demand, and efficiency factors interconnected?

A
  1. Insufficient demand can cause unemployment, reducing investment and hindering growth.
  2. Inefficient use of resources raises costs, reduces profits, and slows innovation or capital accumulation.
  3. Economic growth requires all factors to be in balance to achieve full employment and optimal output.
39
Q

What does the production possibilities curve (PPC) illustrate in the context of economic growth?

A

The PPC shows the maximum combinations of goods an economy can produce. Improvements in supply factors (like technology and resources) shift the PPC outward, while the demand and efficiency factors help ensure the economy operates at an optimal point on the curve.

40
Q

What is the role of labor input in economic growth?

A

The quantity of labor input depends on the labor force size and average workweek length. An increase in the number of workers or longer work hours can contribute to higher economic output.

41
Q

How does labor productivity affect economic growth?

A

Labor productivity is the output per hour worked. Increases in labor productivity, driven by technological advancements, capital investment, and better training, lead to higher economic growth.

42
Q

What determines labor productivity?

A

Labor productivity is influenced by:

  1. Technological progress
  2. The availability of capital goods
  3. The quality of labor (health, education, training)
  4. Efficiency in allocating and managing inputs
43
Q

What is the formula for real GDP in relation to labor input and productivity?

A

Real GDP = Hours of Work × Labor Productivity

44
Q

How can the increase in labor force size and productivity affect a country’s GDP?

A

An increase in labor force size or labor productivity leads to higher total output. For example, if labor productivity rises from $20/hour to $21/hour, GDP increases due to more output per worker.

45
Q

What are the two fundamental ways to increase real output and income?

A
  1. By increasing inputs of resources (e.g., labor, capital).
  2. By raising the productivity of those inputs (e.g., through technological advancements).
46
Q

What are the two main categories of growth accounting used to assess U.S. economic growth?

A

Increases in hours of work
Increases in labor productivity

47
Q

How did labor force growth and labor productivity contribute to U.S. economic growth between 1953 and 2021?

A

Labor force grew from 63.1 million to 161.2 million workers, with labor productivity being the more significant contributor to GDP growth, especially between 2007 and 2019.

48
Q

What percentage of GDP growth was accounted for by productivity growth from 2007 to 2019?

A

82% of the 1.7% annual GDP growth came from productivity growth.

49
Q

What are the five key factors that contribute to productivity growth?

A
  1. Technological Advance
  2. Capital per Worker
  3. Education and Training
  4. Economies of Scale
  5. Resource Allocation
50
Q

What is the largest contributor to productivity growth, and what percentage does it account for?

A

Technological advance, contributing 40% of productivity growth.

51
Q

How does technological advance contribute to productivity growth?

A

It includes innovations in production techniques, managerial methods, and business organization, promoting capital investment and improving resource use across the economy.

52
Q

What is the second-largest contributor to productivity growth, and what percentage does it account for?

A

Capital per worker, contributing 30%.

53
Q

How does increased capital per worker impact productivity?

A

More and better machinery, equipment, and infrastructure make workers more productive, increasing output.

54
Q

What percentage of productivity growth comes from education and training?

A

15% of productivity growth comes from investments in education and training.

55
Q

How has education attainment changed in the U.S. over the years?

A

In 1960, 44% of adults had at least a high school education and 8% had a college education. By 2020, these numbers were 91% and 38%, respectively.

56
Q

What is the contribution of economies of scale to productivity growth?

A

Economies of scale contribute 7% to productivity growth by reducing per-unit production costs as output increases.

57
Q

How do economies of scale affect productivity?

A

Larger firms can use more efficient equipment and manufacturing methods, reducing costs and increasing output.

58
Q

What percentage of productivity growth comes from improved resource allocation?

A

8% of productivity growth comes from better resource allocation.

59
Q

How does improved resource allocation impact U.S. productivity?

A

Workers move from low-productivity sectors (e.g., agriculture) to high-productivity sectors (e.g., technology), improving overall productivity.

60
Q

What are the main determinants of economic growth?

A
  1. Supply factors (resources, labor, capital, technology)
  2. Demand factor (total spending)
  3. Efficiency factor (productivity and allocative efficiency)
61
Q

What is the projected contribution of technological advance, capital per worker, education and training, economies of scale, and resource allocation to productivity growth in the future?

A
  1. Technological Advance: 40%
  2. Capital per Worker: 30%
  3. Education and Training: 15%
  4. Economies of Scale: 7%
  5. Resource Allocation: 8%
62
Q

What were the average annual labor productivity growth rates in the U.S. from 1973 to 2021?

A

1973-1995: 1.5%
1995-2010: 2.8%
2010-2021: 1.2%

63
Q

How does labor productivity growth affect real wages and living standards?

A

Labor productivity determines real wages and living standards. Higher productivity leads to more output, income, and wages.

64
Q

What caused the rise in U.S. productivity growth between 1995 and 2010?

A

The microchip and information technology revolution, start-up companies, increasing returns, and heightened global competition contributed to the productivity boost.

65
Q

How did the microchip contribute to productivity growth?

A

The microchip led to innovations such as personal computers, mobile phones, GPS systems, and the development of the Internet, which enhanced productivity across industries.

66
Q

Name some successful start-ups that emerged during the 1995-2010 productivity boom.

A

Intel, Apple, Microsoft, Amazon, Dell, Yahoo, Google, and eBay.

67
Q

What are increasing returns, and how do they affect productivity?

A

Increasing returns occur when a firm’s output increases more than the increase in inputs, improving labor productivity and reducing per-unit costs.

68
Q

How do network effects impact productivity?

A

Network effects occur when a product’s value increases as more people use it, leading to increased benefits and larger economies of scale, such as with the Internet and social media.

69
Q

What are some factors that contributed to higher productivity between 1995-2010?

A

Specialized inputs, spreading development costs, simultaneous consumption, network effects, and learning by doing.

70
Q

How did global competition affect U.S. productivity growth from 1995-2010?

A

Global competition intensified due to market liberalization and trade agreements, pushing firms to innovate and reduce costs to remain competitive.

71
Q

What are some possible reasons for the productivity slowdown after 2010?

A

High debt levels, overcapacity, the rise of “free” Internet products, and potential technological stagnation.

72
Q

How did high debt levels affect productivity growth after 2010?

A

High debt levels, especially after the 2007-2009 Financial Crisis, led firms and individuals to focus on paying down debts, reducing investments in productivity-enhancing technologies.

73
Q

How did overcapacity contribute to the productivity slowdown after 2010?

A

Excess production capacity built before the recession led firms to avoid upgrading to newer, more productive equipment, slowing productivity growth.

74
Q

How do “free” Internet products like Facebook and YouTube impact productivity growth measurements?

A

“Free” Internet products generate consumer satisfaction but do not contribute significantly to measurable GDP growth, affecting productivity statistics.

75
Q

What is a potential explanation for the productivity slowdown due to technological progress?

A

Technological progress may have stalled after the IT revolution, leading to slower productivity growth until new innovations are developed.

76
Q

What do critics of economic growth argue about its environmental impact?

A

Critics argue that growth leads to pollution, climate change, species extinction, and other environmental problems due to increased waste from industrialization.

77
Q

How do critics view poverty in relation to economic growth?

A

Critics view poverty as a problem of distribution, not production, and argue that addressing it requires wealth redistribution, not more economic growth.

78
Q

What are some of the negative social effects critics associate with economic growth?

A

Critics argue that growth leads to materialism, stress, burnout, alienation, and an imbalance between work and life, harming mental and physical health.

79
Q

Why do critics of economic growth doubt its sustainability?

A

Critics believe that economic growth depletes finite natural resources at an alarming rate, leading to environmental degradation and depletion.

80
Q

What do defenders of economic growth argue about its impact on living standards?

A

Defenders argue that growth increases material abundance, improves living standards, supports infrastructure, and enhances healthcare and public safety.

81
Q

How do proponents of growth view its role in reducing poverty?

A

Proponents believe growth is the most realistic way to reduce poverty by increasing productivity, raising household incomes, and creating jobs, especially in the absence of support for wealth redistribution.

82
Q

What do defenders of economic growth say about working conditions?

A

Defenders argue that growth leads to safer and more efficient machinery, improving working conditions and making workplaces more pleasant.

83
Q

How do defenders of economic growth respond to claims of materialism and worker alienation?

A

Defenders argue that high levels of material wealth do not necessarily lead to dissatisfaction, and growth can increase leisure time and opportunities for self-fulfillment.

84
Q

How do proponents of growth view environmental protection?

A

Proponents argue that pollution is a “problem of the commons” and can be addressed with regulation and incentives. They also claim that economic growth can fund environmental preservation, such as national parks and waste cleanup.

85
Q

Why do some proponents believe economic growth is sustainable?

A

They argue that growth is driven by human knowledge and innovation, not just natural resources. As resources become scarce, substitutes emerge, and economic growth continues through human ingenuity.

86
Q

What is the primary criticism of the sustainability of economic growth?

A

Critics argue that growth depletes finite natural resources, making it unsustainable in the long run.

Macro (16 decks)

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