Economic Growth

Question 1

What is the long-run average rate of growth in real GDP? Real GDP per capita?

Answer 1

• Real GDP per year 3%

* Reap GDP per capita 2%

Question 2

How does long-run U.S. growth generally compare with Europe? Asia? Africa?

Answer 2

• Faster the Europe and Africa, slower than Asia

Question 3

What is productivity? Why does it matter to economic growth?

Answer 3

• Productivity
(an economic measure of output per unit of input)
o Input includes labor and capital
o Output measured in revenues and other GDP components
o Output per worker (Y/L)
o (Output/worker)labor force (Y=Y/LL)
• Economic growth
o Productivity allows economy to accomplish more with less
• Capital and labor are both scarce resources so maximizing their impact is always a core concern of mod. Business

Question 4

What is the role of technology in economic growth?

Answer 4

• Technology
o Innovation and invention
• Important to economic growth
• New ways of doing things are important

Question 5

Whats is the role in economic growth: Political Structure and property rights

Answer 5

o Interplay of economic and political freedom

o Stake in system results in work harder

Question 6

Whats is the role in economic growth: Human Capital

Answer 6

o Determinant in labor productivity, results in growth

Question 7

Whats is the role in economic growth: Capital

Answer 7

o Investment in capital increases productivity

Question 8

Whats is the role in economic growth: Savings

Answer 8

o Higher saving higher steady state Y/L (output per worker)

Question 9

Whats is the role in economic growth: Education

Answer 9

o Increases human capital which increases productivity

Question 10

Whats is the role in economic growth: Natural Resources

Answer 10

o Part of the production function
• Production function
(defines marginal product and to distinguish allocative efficiency)
• Y=Af

Question 11

Whats is the role in economic growth: Industrial Policy

Answer 11

o Government planning

• Does not increase LR growth

Question 12

Whats is the role in economic growth: Population growth

Answer 12

o Might cause economic growth
• Malthus’ Law
 Population grow geometrically, food arithmetically

Question 13

Whats is the role in economic growth: Research and Development

Answer 13

o Important to economic growth
o Knowledge public good
o Internalize externalize with patents

Question 14

Whats is the role in economic growth: Taxes

Answer 14

o Less likely better

o Perhaps consumption tax

Question 15

Whats is the role in economic growth: Free trade

Answer 15

o Encouraged

o Comparative advantage

Question 16

Whats is the role in economic growth: Trickle down economics

Answer 16

o Pro-business/ pro-rich policies will eventually benefit the non-rich
o Helps the rich crumbs down to the rest

Question 17

Whats is the role in economic growth: Government budget deficits

Answer 17

o Reduced gov spending and deficits to reduce crowing out which result in encouraging of saving, investment, and innovation
o Crowding out is when gov must finance its spending with taxes and/or with deficit spending leaving business with less money and effectively ’crowding them out’

Question 18

How do you calculate growth rates?

Answer 18

• Rule of 72
o #years to double =72/ growth rate
o growth rate= 72/#years to double

Question 19

What is the rule of 72? (Or 70)? How do you use it?

Answer 19

• 72/ growth rate= # years to double
o 10% -> 72/10=7.2
o Doubles in 4 years -> 72/x=4 x=18% per year

Question 20

How does an increase in saving affect the economy in the long-run? Short run?

Answer 20

• Long-run
o Capital accumulation
o Consumption tax, IRA’s
• Short-run

Question 21

Explain the idea of Classical/Malthusian theory of economic growth?

Answer 21

o Limited resources(land) leads to diminishing returns and ultimately decline in per capita wages to subsistence levels

Question 22

Explain the idea of Neo-Classical – Slow Model theory of economic growth?

Answer 22

o Economy grows until in the long-run it hits a steady state with no growth in per capita GDP/ income unless tech change(unexplained by model-outside of it)

Question 23

Explain the idea of Endogenous or New Growth Theory theory of economic growth?

Answer 23

o Explains determinants of technological change and thus growth

Question 24

Explain the idea of Creative Destruction theory of economic growth?

Answer 24

o Revolutionizes the economic structure from within, incessantly destroying the old one which can cause progress and improve standards of living

Question 25

What’s wrong with Malthus’ law? (Why hasn’t it held for developed countries?)

Answer 25

• Malthus Law
(population grows geometrically, food arithmetically wages driven down to subsistence levels)
o Ignored increases in capital, technological change, population control
• Developed countries are always growing