ECO2102 Economic Growth (1)

Question 1

What does economic growth measure?

Answer 1

Income = output in a nation

Question 2

How does GDP differ from GNP?

Answer 2

GDP measures the value of all the goods and services produced within the country’s borders, whereas GNP measures the value produced by the countries nationals regardless of where they live.

Question 3

What are some criticisms of GDP as a measure of development?

Answer 3

Ignores Income equality, doesn’t measure happiness, doesn’t account for environmental damage or social impacts.

Question 4

List some social metrics that GDP per capita is linked with.

Answer 4

Life expectancy, Child mortality rates and Undernourishment

Question 5

What does the Solow model inspect?

Answer 5

The Solow model looks at the determinants of economic growth and the standard of living in the long-run.

Question 6

What is the Solow Model made up of?

Answer 6

It is built from a production function, there forth shoes a relationship between the factors of production and output.

Question 7

What is the basic equation for the production function?

Answer 7

Y=F(K,N), where Y = total output in the economy, K = capital and N = labour

Question 8

What is the more complex equation for the production function?

Answer 8

AK^N^1- = Y where A is a positive parameter which represents total factor productivity and * is a parameter between 0 and 1 showing the share of capital income .

Question 9

What do we assume about capital (K) in the Solow model?

Answer 9

We allow K to grow; investment causes it to grow and depreciation causes it to shrink.

Question 10

What do we initially assume about labour (N) in the Solow model?

Answer 10

We initially assume that labour is constant: however population growth will cause increases in the labour force.

Question 11

How would we write the production function in “per worker” terms?

Answer 11

Assume constant returns to scale which allows division of each variable of the production function by N to get per worker terms.
y=Y/N = output per worker
k=K/N = capital per worker

Question 12

Explain why the the gradient of a production function is the way it is.

Answer 12

The gradient is positive as more capital per worker will allow for more output, however the gradient becomes flatter along the graph due to diminishing Marginal Product of Capital.

Question 13

What does Diminishing marginal product mean?

Answer 13

It means that increasing K (capital) or N (labour) leads to smaller and smaller gains in output.

Question 14

How do you check if a function has diminishing marginal product?

Answer 14

You check whether the slope of the production function is decreasing with K or N through differentiation.

Question 15

How is output split up in the Solow model?

Answer 15

Output (Y) = C+I where C = total consumption and I = total investment. we assume now gov spending or taxation and also that it is a closed economy.

Question 16

What is the notation for output in per worker terms?

Answer 16

y = c+i

Question 17

What is the equation for the consumption function?

Answer 17

C = (1-s)Y, where s = the saving rate.
In per worker terms c=(1-s)y.

Question 18

What is the investment consumption and explain it?

Answer 18

I=sY or in per worker terms i=sy= sf(k). This is because in a closed economy we assume that investment = savings.

Question 19

What is depreciation in a production function?

Answer 19

Depreciation is the fraction of the capital stock that wears out each period.

Question 20

What is steady state in a production function?

Answer 20

Steady state is when investment is just enough to cover depreciation which means that capital remains constant. Steady state is depicted as k*

Question 21

What is Capital accumulation?

Answer 21

When depreciation is lower than investment sf(k) capital increases/accumulates over time.

Question 22

What is the notation for change in capital per worker over time?

Answer 22

k with a dot above it

Question 22

Explain what would happen if investment is greater than depreciation?

Answer 22

If investment exceeds depreciation then capital accumulates and capital per worker increases until it reaches steady state k*.

Question 23

What does steady state k* also represent?

Answer 23

Steady state also stands for long run.

Question 24

How do you solve for steady state?

Answer 24

As depreciations equals investment, take the equation sf(k*)= (dep)k* plug in assumed values and solve.

Question 25

What does this model suggest is the relationship between savings and income/capital per worker?

Answer 25

It suggests that countries with a higher savings rate (investment) will have higher levels of capital and income per worker in the long run.

Question 26

What are some things that may affect the savings rate?

Answer 26

Interest rates, consumer confidence and income levels. Anything that will effect peoples decision to save more or less.

Question 27

What does n represent in the Solow model?

Answer 27

n represents the population growth rate. Calculated by change in N over N.

Question 28

What happens to the Solow equation of motion when we take into account population growth?

Answer 28

Break-even investment replaces depreciation. (dep)k becomes (dep+n)k

Question 29

What is the impact of faster population growth?

Answer 29

The break-even investment line shifts to the left (becomes steeper) meaning that the new steady state will be lower then before.

Question 30

What does this model predict is the impact of faster population growth?

Answer 30

In the long run countries with higher population growth rates will have lower levels of capital and income per worker.

Question 31

What is the golden rule?

Answer 31

The golden rule level of capital is the steady state value of k that maximizes consumption. It is shown as k*gold.

Question 32

Where is consumption per worker maximised?

Answer 32

Where MPK* = dep + n, where the slope of the production function at steady state (MPK*) equals the slope of the depreciation function (dep+n).

Question 33

What is one key quality of the Golden rule steady state?

Answer 33

The economy does not have a tendency to move toward the Golden rule steady state.

Question 34

How can policymakers achieve the golden rule steady state?

Answer 34

Savings = Private savings +Public Savings, the government can change public savings which are simply taxes - gov spending.

Question 35

What would happen trying to reach the golden rule steady state when the current steady state is below k*gold e.g. too little capital?

Answer 35

Increasing the savings rate would cause an initial decrease in consumption. However as savings=investment, investment would increase causing incomes to increase which would slowly bring consumption to above where it started.

Question 36

What is important to note about changes in the savings rate and population on economic growth.

Answer 36

Changes in the savings rate and population change only temporarily effect growth until steady state is reached again. This is because in steady state income per worker remains constant.

Question 37

What is x and how is it calculated?

Answer 37

x = the rate of growth of labour efficiency, it is calculated by dividing the change in labour efficiency by labour efficiency (A)

Question 38

What is the production function that contains labour efficiency?

Answer 38

Y=F(K,AN) where A times N = number of effective workers.

Question 39

What is the name for the production function in per effective worker terms?

Answer 39

Intensive form

Question 40

How do you turn the production function into per effective worker terms?

Answer 40

Divide by AN

Question 41

What is the equation for break-even investment per effective worker and explain it?

Answer 41

( dep + n + x)k^, depk^ replaces depreciating capital, nk^ provides capital for new workers and xk^ to provide capital for new effective workers created by tech progress.

Question 42

What is the equation for change in capital per effective worker over time?

Answer 42

sf(k^)-(dep+n+x)k^= k^ with dot above

Question 43

How will a rise in the rate of technological progress effect the steady state level?

Answer 43

An increase in technological progress causes x (rate of growth of labour efficiency) to increase. This causes an increase in break-even investment which leads to a lower steady state level of y^ and k^.

Question 44

Why are the steady state results for per effective workers misleading?

Answer 44

y^* = (Y/AN)* however when just finding income per worker in the steady state (y*) you have to multiply A to the other side of the equation. This means as A increases (tech progress increasing) then incomer per worker in the steady state also increases.

Question 45

How fast does the economy grow in the steady state?

Answer 45

the growth rate of Y is the growth rate of A plus N. gy=x+n

Question 46

What two things have a steady state growth rate that isn't 0?

Answer 46

Output per worker =x Total output = n+x

Question 47

What is k^*gold?

Answer 47

the Golden Rule level of capital per effective worker e.g. the steady state value of k^* that maximises consumption per effective worker c^*.

Question 48

How does the Solow models steady state exhibit balanced growth?

Answer 48

Output and Capital per worker, y and k , grow at rate x in steady state . Total capital and output, K and Y, grow at rate n+x

Question 49

What is absolute convergence?

Answer 49

When poor countries grow faster than rich countries and catch up with the GDP per capita of developed countries.

Question 50

What is capital deepening?

Answer 50

When poor countries grow faster than rich countries by accumulating more capital per worker.

Question 51

What does the Solow model predict on convergence?

Answer 51

It predicts that "other things being equal" "poor" countries with low k^ and y^ should grow faster than rich ones.

Question 52

Why do poor countries with a low k^ and y^ grow faster?

Answer 52

To obtain the rate of growth of capital per effective worker (gk^) we must divide the solow equation by k^. For poor countries with low k^ the growth rate will be faster.

Question 53

What is APK?

Answer 53

APK is the average product of capital. It is the term that you get when sf(k^) is divided by k^ when you are calculating gk^

Question 54

What is conditional convergence?

Answer 54

The prediction that actually countries converge to their own steady states which are determined by variables such as the saving and population growth.