economic growth Flashcards
what changed economic growth rate in the past?
- agricultural advances resulted in more food and less hunger
- fewer people needed to work on farms
- the industrial revolution sparked tremendous economic growth
what does economic growth ultimately lead to?
higher standards of living and longer lives
what is the production function?
describes the methods by which inputs are transformed into outputs
input -> output (GDP)
technology is constant in the function
how do businesses transform inputs to outputs?
the production function describes the management techniques your company uses to transform inputs into outputs
better labour/ technology
what is the aggregate production function?
relates total output (GDP) to the quantity of inputs imployed
what is human capital?
skills that workers bring to a job
what is physical capital?
tools, machinery, and structures
what is the mathematical representation of the aggregate production function?
Y = f(L, H, K)
where
Y = output
L = labour
H = human capital
K = physical capital
what does the aggregate production function tell us about economic growth?
a country will production more output if
1. it employs more workers (more labour)
2. its workers become more highly skilled (increase human capital)
3. accumulates more physical capital
4. better/ more technology
how does labour and total hours worked affect economic growth?
labour input is measured as the total number of hours worked across the economy
the more labour that workers do, the more output gets produced
population boosts total GDP, but not GDP per person
what demographic factor can inhibit economic growth?
- the dependency ratio
what is the dependency ratio?
the number of people too young or too old to work per 100 people of working age
how does human capital affect economic growth?
output reflects the quantity of hours worked and the productivity of people at work
labour productivity partly depends on human capital
what is labour productivity?
the quantity of goods and services that each person producers per hour of work
how does capital accumulation affect economic growth?
the equipment you work with also determines how much you produce per hour
you are more productive when you have the right equipment
what is capital stock?
the total quantity of physical capital used in the production of goods and services
what are the characteristics of capital?
- physical capital is a complement to labour
- investment depends on the savings rate
- foreign investment builds the capital stock
how does technological progress affect economic growth?
makes it possible to produce more from given resources
is embodied by computers
what are the insights that the production function gives into the process of economic growth?
1) constant returns to scale
2) diminishing returns to capital
3) poor countries can enjoy catch-up growth
what does constant returns to scale mean?
refers to the situation when all inputs are increased by some proportion and output increases by the same proportion
what is the replication argument?
states that to double output in your business you can replicate everything you are already doing
what is the law of diminishing returns?
when one input is held constant, increases in the other inputs will, at some point, begin to yield smaller and smaller increases in output
what does diminishing return imply for poor countries?
implies poor countries can catch-up to wealthier ones
investment in capital will have a large return for a relatively poor country
what is the solow model?
the capital stock will grow as long as investment outpaces depreciation
capital per worker (K/L) will eventually stop growing
capital accumulation can’t sustain long-term growth
where does technological progress come from?
driven by how quickly new ideas are created and how many resources are devoted to generating new ideas
why can idea-driven economic growth be sustained?
- ideas can be shared freely
- ideas do not depreciate with use
- ideas may promote other ideas
what is the role of incentives?
institutions can provide incentives for people to invent new ideas and invest in human or physical capital
what are some examples of incentives?
- property rights
- government stability
- efficiency of regulation
- policy to encourage innovation
what are property rights? how do they promote economic growth?
property rights grant control over a tangible or intangible resource
without property rights, there is no incentive to create wealth
how does government stability promote economic growth?
a stable government makes economic growth more likely
corruption and political instability discourage investment and innovation
how does efficient regulation promote economic growth?
bureaucratic obstacles, including excessive regulatory oversight, can hinder economic growth
