Chapter 9: Long Run Economic Growth

Question 1

Rule of 70

Answer 1

years for variable to double = 70/annual growth rate of var.

the time it takes a variable that grows gradually over time to double is approx 70/that variable’s annual growth rate:

Question 2

Next 4 slides are sources of Long rungrowth;

1. labor productivity (productivity)

Answer 2

output per worker

Question 3

2. Physical capital

Answer 3

consists of human-made resources such as buildings and machines

Question 4

3. Human capital

Answer 4

improvement in labor created by education and knowledge of the workforce

Question 5

4.Technology

Answer 5

technical means for the production of goods/services

Question 6

Aggregate production function Y/L

Answer 6

hypothetical function that shows how productivity (real GDP/worker) depends upon the quantities of:

1. physical capital/worker (K/L)
2. human capital/worker (H/L)
3. state of technology (T)

Y/L = f(K/L, H/L, T)

Question 7

Diminishing returns to physical capital

Answer 7

An aggregate production function exhibits diminishing returns to physical capital when, if human capital and state of technology is fixed, each successive increase in the amount of physical capital leads to a smaller increase in productivity

Question 8

Growth accounting

Answer 8

estimates the contribution of each major factor in the aggregate production function to economic growth

1. the amount of physical capital/worker grows 3%/year
2. Each 1% rise in physical capital/worker (if human capital and technology constant),raises output/worker by 33%.
3. Total factor productivity= amount of output that can be achieved with a given amount of factor inputs.

Question 9

Importance of new technology for economic growth

Answer 9

1. enables science to discover still more new things
2. enables people to work faster
3. leads business people to alter the way they do business

Question 10

Why growth rates differ among countries

Answer 10

Affected by:

1. savings/investment spending
2. foreign investment
3. education
4. infrastructure
5. research and development
6. political stability
7. protection of property rights

Question 11

Role of Govt in Promoting economic growth

Answer 11

1. Political stability
2. Protection of property rights
3. Even when govts aren’t corrupt, excessive govt intervention can be a brake on economic growth

Question 12

Convergence hypothesis

Answer 12

differences in real GDP/capita among countries tend to narrow over time because countries that start with lower real GDP/capita tend to have higher growth rates.

This is not true of all regions, which has led economists to believe that the convergence hypothesis fits the data only when factors that affect growth, such as education, infrastructure, and favorable policies and institututions, are held equal across countries

Question 13

East Asia’s spectacular growth

Answer 13

high savings and investment savings rates, education, adoption of technological advances from other countries

Question 14

LAtin America poor growth

Answer 14

poor education, political instability, irresponsible govt policies

Question 15

Sub-Saharan Africa poor growth

Answer 15

severe instability, war, poor infrastructure

Question 16

Is Long-run economic growth sustainable?

Answer 16

1. Yes, if it can continue in the face of limited supply of natural resources and impact of growth on environment
   a. How large are supplies of key natural resources?
   b. how effective will technology be at finding alternatives to natural resources?
   c. can long run economic growth continue in the face of resource scarcity?

Question 17

Economic Growth and Environment

Answer 17

1. Limits in growth due to environmental degradation > difficult to overcome because it requires effective govt intervention which means reduction in growth
2. However, it is estimated that a large reduction in remissions would require only a modest reduction in growth rate
3. Consensus that government action to address climate change and greenhouse gases should be in form of market-based incentives.