Economic Growth 2 - A Framework for Analysis

Question 1

What is capital?

Answer 1

The tools that workers have at their disposal: machines, vehicles, buildings, and other pieces of equipment.

Question 2

What is investment?

Answer 2

The goods and services devoted to the production of new capital rather than consumed.

Question 3

What is productivity?

Answer 3

The amount of output produced with each unit of capital

Question 4

What is technology?

Answer 4

The available knowledge about how inputs can be combined to produce output.

Question 5

What is efficiency?

Answer 5

How the available technology and inputs into production are actually used in producing output.

Question 6

What’s productivity equal to?

Answer 6

A = T X E
Productivity = Technology X Efficiency

Question 7

What are fundamentals?

Answer 7

Deeper characteristic determinants of a country’s income other than immediate determinants.

Question 8

What’s the difference between a proximate and ultimate cause?

Answer 8

A proximate cause is an event that is immediately responsible for cause some observed result.
An ultimate cause is something that affects an observed result through a chain of intermediate events.

Question 9

What is a production function?

Answer 9

A mathematical description of how inputs a firm uses are transformed into its output.

Question 10

Describe graphically how differences due to factor accumulation would show up on the production function for two countries.

Answer 10

There would be one single production curve with each country at different levels of output and factors.

Question 11

Describe graphically how differences due to productivity would show up on the production function for two countries.

Answer 11

There would be two different production curves, the one on top being the one with more productivity. Who has more output depends on where they are on their respective production curves.

Question 12

Describe graphically how differences due to productivity would show up on the production function for two countries.

Answer 12

Like differences due productivity, there would be two different production curves.
Which curve is on top and who has more output depends on where they are on their respective production curves as well as how their curves are shaped.

Question 13

What are economic models?

Answer 13

Simplified representations of reality that can be used to analyze how economic variables are determined, how a change in one variable will affect others, and so on.

Question 14

What is quantitative analysis?

Answer 14

The economic method of using data to assign magnitudes to the different part of an economic model.

Question 15

One of our fundamental tools will be to look at the correlation between variables. What does correlation describe?

Answer 15

Correlation describes the degree to which two variables tend to move together.

Question 16

When are two variables positively correlated?

Answer 16

When high values of one tend to be associated with high values of the other.

Question 17

When are two variables negatively correlated?

Answer 17

When high values of one tend to be associated with low values of the other.

Question 18

What is the correlation coefficient?

Answer 18

The degree of correlation between two variables expressed as a number between -1 and 1.

Question 19

What does a correlation of 1 indicate?

Answer 19

A perfectly positive correlation.

Question 20

What does a correlation of -1 indicate?

Answer 20

A perfectly negative correlation.

Question 21

What does a correlation of 0 indicate?

Answer 21

That there is no tendency for the two quantities to vary together.

Question 22

Describe when X causes Y.

Answer 22

Causation running from X to Y may be direct or it may operate through a chain of intermediate causal links.

Question 23

What is it called when Y causes X?

Answer 23

Reverse causation.

Question 24

Is it possible for causality to run in both directions?

Answer 24

Yes

Question 25

How are variables typically plotted on a graph when there is correlation?

Answer 25

It’s traditional to plot X on the horizontal axis and Y on the vertical if we know that X causes Y. However, plotting a variable on the horizontal axis doesn’t prove that it causes the other variable.

Question 26

What is the fourth possible correlation between variables?

Answer 26

There is no direct causal relationship between X and Y, but some third variable, Z, causes both X and Y. This third variable (Z) is known as an omitted variable.

Question 27

Which technique provides a way of separating out the effects of third variables from the relationship between the two variables of interest when there is an omitted variable?

Answer 27

Multiple Regression.

Question 28

There are a number of techniques for teasing out causation. What is one of the most useful, which is also taught in many econometrics classes?

Answer 28

Instrumental variables.

Question 29

What is another more sophisticated way of probing the underlying determinants of economic behavior?

Answer 29

RCTs: Randomized Controlled Trials.

Question 30

What is one problem with RCTs?

Answer 30

The issue of “external validity:, that is, whether a treatment that works in one setting will work in other places.

Question 31

What’s a more serious problem with RCTs?

Answer 31

There are sharp limits on the kinds of hypotheses that can be tested using RCTs.

Question 32

Give an example of how RCTs can miss out on important effects?

Answer 32

An RCT can show that providing an individual with more schooling raises his or her earnings, but it doesn’t show whether these higher earnings represent an addition tot he total level of earnings in the economy or simply the treated individual displacing some nontreated person in a high-wage job.

Question 33

What is cross-sectional data?

Answer 33

Observations of different units (ex: countries or people) at a single point in time.