Economic Growth Flashcards
Economic growth
a change in a country’s output or income that leads to an improvement in the standard of living. Is measured by the increase in real GDP and real GDP per capita. In the US is calculated by Bureau of Economic Analysis. Leads to lower poverty rates and longer life expectancies.
Compounding
The ability of growth to build on previous growth. Allows income, GDP, debts to increase over time. Small differences in growth rates translate into large differences in output over time.
Rule of 70
Provides an estimate of the number of years for a value to double. Number of years to double in value=70/growth rate
When does the short-run growth occur?
It occurs when an economy makes use of existing but under-utilised resources. Is common when countries are recovering from an economic downturn or when obstacles preventing resources from being fully used are loosened.
When does long-run growth occur?
It occurs when an economy finds new resources or improves ways to use existing resources. Capacity to produce goods and services rise, leading to long-run growth.
4 factors of production
- land N - land and natural resources
- labor L - human capital H, improved by education or training
- capital K - manufactured goods used in the production process
- entrepreneurial ability A - ideas and tech that is developed
Production function
Relationship between the amount of inputs used in production and the amount of outputs produced. Vary by firms, etc. Output = Axf(L, K, N, H)
Output per person
Adjust the production function for changes in population growth. Having more physical capital per person will increase the productivity of labor. Output per worker = Axf(L/L, K/L, H/L, N/L)
Productivity
It refers to how effectively inputs are converted into outputs. Can also be defined as production per worker, or production per hour worked, or GDP per capita. Related to living standards
Labor productivity
The ratio of the output of goods and services to the labor hours devoted to the production of that output
What should be done for economic growth?
Countries must expand the quantity and quality of labor
Investment in human capital
Investment in education and on-the-job training
How productivity of labor can be increased?
Increase in land and natural resources, the quality of force, capital-to-labor ratio, technology
Capital-to-ratio
The capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages
Diminishing returns to capital
Each additional unit of capital provides a smaller increase in output than the previous unit of capital. Powerful contributor to productivity
Catch-up-effect
Developing countries are able to achieve greater productivity for each unit of capital invested because they have the advantage of using tech that have already have been developed by other countries
Total factor productivity
The portion of output produced that is not explained by the number of inputs used in production. Captures the factors that influence the overall effectiveness of inputs. Value of new innovations, which increase the efficiency of inputs
Infrastructure
The -unlicensed capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible (нематериальный) resources, such as protection of property rights and a stable monetary environment (Includes dams, roads, bridges, transportation network, air and rail lines, power-generating plants and power transmission lines (tangible goods))
For what does government provide protection?
Property rights, enforcement of contracts and stable financial system
What does the Index of Economic Freedom measure?
It measures the impact of the free markets, which supports economic growth. 12 categories: property tights, government integrity, judicial effectiveness, taxes, government spending, fiscal health, business, labor, money, trade, investment and finance
Why the nominal interest rate is greater than the real one?
Due to inflation
What happens when the unemployment rate equals the natural rate of unemployment?
Economy produces full employment output
