Economic Growth Flashcards
What are the 8 assumptions of the Solow Growth model?
- time is continuous
- closed economy
- production function displays constant returns to scale
- production function displays diminishing marginal product of capital
- population = labour force (full employment)
- population/labour grows at constant rate
- society invests a constant fraction of output into capital stock
- capital depreciates at a constant rate
What does the Solow model show?
The role of factor accumulation in economic growth
What does the production function look like for capital in a daigram where Y = output per worker, and X = capital per worker
Curve from the origin in the shape of an r
What is needed to improve labour productivity when capital per worker increases in the Solow Model?
More capital
How do you find the optimal level of capital per worker in the Solow Model?
Where production function = capital dilution
How does the output per worker converge to a steady state?
It will grow/shrink from an initial position toward the steady state determined by the investment rate
Steady state capital per worker and output per worker are rising with…? (3)
- Investment rate
- Technology
- Human capital
Steady state capital per worker and output per worker are declining with…? (2)
- Depreciation rate
- Population growth
When does the Solow model predict growth will be faster?
When an economy is further away from the steady state - growth will be faster
A country with low capital stock per worker will have a _______ growth rate in capital per worker?
HIGH
A country with high capital stock per worker will have a _______ growth rate in capital per worker?
LOW
What is the prediction of the Solow model relating to high and low income countries when they have the same level of investment?
Low income countries will grow faster than high income countries meaning the low income countries will eventually catch up to the high income countries
What is the main source of economic growth in the Solow model?
Capital accumulation
Why can countries not grow forever?
Diminishing marginal product of physical capital
What is the impact of a country having a high population growth?
Higher pop growth -> quicker dilution of capital -> cannot accumulate as much capital per worker
What is the impact of an increase in human capital?
Higher human capital -> each worker is more productive -> for each level of capital per worker each worker can produce more -> higher output per worker
Higher human capital -> investment per worker increases -> so can accumulate more capital per worker
What is development accounting?
Breaks down income differences into parts accounted for by prody differences and factor accumulation differences
What is growth accounting?
Breaking a country’s growth into parts accounted for by growth in productivity and growth in the quantity of factors of production
Ideas/knowledge increase economic growth - why?
Non-rivalry, so has increasing returns to scale - you have one idea and any number of workers can be more productive because of it
What does the extended Solow Model include?
Technological progress (which grows at a constant rate)
What is the impact of technological progress in the extended Solow model?
Improved productivity of every worker which enables capital accumulation
What characteristics of technology enables long-run growth?
Non rival and partially excludable
How does the rule of law affect growth?
A reliable legal system should lead to high factor accumulation and productivity so higher growth
What is Wagner’s law?
The size of a government will grow as countries become richer due to more complex regulations and advanced public good provision
How do taxes affect growth?
Increase in tax leads to lower efficiency and discourages economic activity so lower growth
What affect do civil conflicts have on growth?
Negative
What are the benefits of macroeconomic stabilization for economic growth?
Low and stable inflation reduces variation in aggregate and relative price drivers, improves signaling and enables long-term contracts
What are the benefits of democracy for economic growth? (3)
- Limits on power of rulers - avoids corruption
- People free to think and develop new ideas
- Rule of law is established (boost investment and prody)
What are the drawbacks of democracy for economic growth? (2)
- Political instability e.g. from elections
- Policies favour short-run gains rather than long-run growth
What does the Lorenz curve show? What can be said about the diagram?
Shows the income inequality - the more bowed out the Lorenz curve is from the line of perfect equality the more unequally income is distributed
What does the Gini coefficient measure? How is it calulcated?
The level of income inequality - it is the area between the Lorenz curve and the line of perfect equality divided by the total area under the line of perfect equality
How do you interpret a Gini coefficient?
Perfect equality = 0% or 0
Perfect inequality = 1 or 100%
What does the human development index measure? What is the scale?
A measure of economic development and welfare.
A value of 1 - high level of economic development
A value of 0 - very low level
What 3 factors are included in the human development index?
- Life expectancy index (avg life exp compared to global)
- Education index - mean and expected years of schooling
- Income index (GNI at PPP)
What are the limitations of the human development index? (5)
- Wide divergence within countries
- Reflects long-term changes but not short-term
- Higher income doesn’t indicate welfare
- Doesn’t account for equality
- Welfare depends on other factors e.g. threat of war, clean drinking water etc
What is endogenous growth?
The theory that suggests that economic growth is generated within a system as a direct result of internal processes e.g. technology
