ECONOMIC GROWTH

Question 1

GDP growth rate

Answer 1

(Current GDP-Previous GDP)/(Previous GDP ) ×100

Question 2

Average annual growth rates

Answer 2

(wage2/wage1) ^ (1/n) - 1

Question 3

The Solow Model

Answer 3

• economy modelled as a “production function”: y = f (K, L, H)
  L (Labour inputs) – population, demographics
  H (Human capital) – literacy, education rates
  K (Physical capital) – equipment, structures, infrastructure (capital stock)

Question 4

Diminishing returns to each input - What happens if:
a) you increase all inputs by 5%
b) you increase one input by 5%
c) you increase the population (and labour supply) by 5%

Answer 4

a) income per capita doesn’t change, but total income changes
b) total income increases by less than 5%
c) income per capita decreases because you didn’t increase capital

Question 5

Institutions that promote economic growth:

Answer 5

• property rights
• government stability
• efficient regulation (2 days to start a business in Canada, 230 in Venezuela)
• government policy encouraging innovation: intellectual property laws, R&D subsidies