Chapter 8: Growth, Capital Accumulation, and the Economics of Ideas: Cathcing up vs the Cutting Edge

Question 1

What are the two types of growth?

Answer 1

1. Catching up

2. Cutting edge

Question 2

What is Catching up growth?

Answer 2

Poor countries start by adopting ideas, technologies, and methods of management developed by rich countries

Question 3

What is Catching Up growth usually motivated by?

Answer 3

Capital accumulation and adopting ideas

Question 4

What is cutting edge growth?

Answer 4

Rich countries are usually the developers of new ideas, technologies, and methods of management

Question 5

What does this equation mean?

Y = F (A, K, eL)

Answer 5

GDP is a function of technology, physical capital, and labor

Question 6

What does A symbolize?

Answer 6

Technology

Question 7

What does K symbolize?

Answer 7

Physical capital

Question 8

What does eL symbolize?

Answer 8

Labor

Question 9

What does the Solow Growth Model say about Y = (K)?

Answer 9

As K (physical capital) increases, GDP will increase

Question 10

What is the Iron Logic of Diminishing Returns?

Answer 10

More capital, K, creates more output but at a diminishing rate

Question 11

What is the marginal product of capital?

Answer 11

The increase in output caused by the addition of one more unit of capital; the marginal product of capital diminishes as more and more capital is added

Question 12

What does this mean ?

Y =(√K)

Answer 12

Output is the square root pf physical capital input

Question 13

How do we calculate GDP for any level of physical capital?

Answer 13

Y = (√K)

Question 14

What is capital?

Answer 14

Output that is saved and invested rather than consumed

Question 15

What does the Greek letter gamma ( ℽ ) represent?

Answer 15

The fraction of output that is saved and invested in new physical capital

Question 16

How do we right the fraction of output that is saved and invested? ( ℽ )

Answer 16

amount invested / total output

Question 17

How do we represent the fraction of output that is consumed?

Answer 17

1 - ℽ

Question 18

How do we represent the fraction of physical capital that depreciates?

Answer 18

𝛿 = amount depreciated / capital stock

Question 19

What is the steady-state level of physical capital?

Answer 19

Where the physical capital stock is neither increasing nor decreasing

Question 20

If depreciation is greater than investment, the stock of K will increase.

True or False?

Answer 20

False

Question 21

The greater the capital stock the greater the________.

Answer 21

depreciation

Question 22

Capital increases or decreases until investment = ?

Answer 22

depreciation

Question 23

What happens when investment > depreciation?

Answer 23

Physical capital stock grows and the output is bigger the next period

Question 24

What happens when investment

Answer 24

Physical capital shrinks and output is smaller next period

Question 25

What happens when investment=deprecation?

Answer 25

Physical capital stock and output remain the same. This is called steady-state

Question 26

What are diminishing returns to physical capital?

Answer 26

As an amount of an input rises, its marginal product falls

Question 27

Can long run economic growth solely be due to capital accumulation?

Answer 27

No

Question 28

What does an increase in the investment rate do to a country’s steady state level of GDP?

Answer 28

It increases it

Question 29

When a country’s capital stock is below the steady state, the country will grow more rapidly because it will invest in capital that has _________

Answer 29

a high marginal product

Question 30

What is the one thing that can keep the economy growing in the long run?

Answer 30

Technology/better ideas

Question 31

What is conditional convergence?

Answer 31

The tendency- among countries with similar steady state levels- for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income

Question 32

An increase in technological knowledge mean that we can get more__________

Answer 32

output from the same amount of input

Question 33

The development of better ideas shifts the production function _________

Answer 33

upward

Question 34

Better ideas also increase capital accumulation.

True or False?

Answer 34

True

Question 35

Who primarily researches, develops, and implements new ideas for increasing output?

Answer 35

Profit-seeking firms

Question 36

What are two ways that individuals can protect their intellectual property?

Answer 36

1. Patents

2. Copyrights

Question 37

What do patents allow for firms in terms of profit?

Answer 37

It allows them to operate as a monopoly for 20 years so they get all of the profit

Question 38

What is a contributing factor to the underproduction of new ideas?

Answer 38

Spillovers

Question 39

What does non-rival mean?

Answer 39

When one person’s use of the good does not reduce the ability of another person to use the same good

Question 40

In a larger market the incentive to research and develop new ideas ______

Answer 40

increases

Question 41

Where is the profit maximizing amount of private investment found?

Answer 41

Where the private marginal benefits just equal the private marginal costs

Question 42

Where is the optimal social investment in R&D found?

Answer 42

Where the social marginal benefits just equal the marginal cost

Question 43

What is the government’s role in improving the production of new ideas?

Answer 43

They provide subsidies and tax breaks for R&D expenditures (universities etc.)

Question 44

What is the formula to determine technological progress (A)?

Answer 44

A=Population * Incentives * Ideas per hour

Question 45

The Solow Method tells us that long term economic growth is best explained by _______

Answer 45

better ideas/technological advancements