Economic Growth Flashcards
What is the long-run average rate of growth in real GDP? Real GDP per capita?
- Real GDP per year 3%
* Reap GDP per capita 2%
How does long-run U.S. growth generally compare with Europe? Asia? Africa?
• Faster the Europe and Africa, slower than Asia
What is productivity? Why does it matter to economic growth?
• 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
What is the role of technology in economic growth?
• Technology
o Innovation and invention
• Important to economic growth
• New ways of doing things are important
Whats is the role in economic growth: Political Structure and property rights
o Interplay of economic and political freedom
o Stake in system results in work harder
Whats is the role in economic growth: Human Capital
o Determinant in labor productivity, results in growth
Whats is the role in economic growth: Capital
o Investment in capital increases productivity
Whats is the role in economic growth: Savings
o Higher saving higher steady state Y/L (output per worker)
Whats is the role in economic growth: Education
o Increases human capital which increases productivity
Whats is the role in economic growth: Natural Resources
o Part of the production function
• Production function
(defines marginal product and to distinguish allocative efficiency)
• Y=Af
Whats is the role in economic growth: Industrial Policy
o Government planning
• Does not increase LR growth
Whats is the role in economic growth: Population growth
o Might cause economic growth
• Malthus’ Law
Population grow geometrically, food arithmetically
Whats is the role in economic growth: Research and Development
o Important to economic growth
o Knowledge public good
o Internalize externalize with patents
Whats is the role in economic growth: Taxes
o Less likely better
o Perhaps consumption tax
Whats is the role in economic growth: Free trade
o Encouraged
o Comparative advantage
Whats is the role in economic growth: Trickle down economics
o Pro-business/ pro-rich policies will eventually benefit the non-rich
o Helps the rich crumbs down to the rest
Whats is the role in economic growth: Government budget deficits
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’
How do you calculate growth rates?
• Rule of 72
o #years to double =72/ growth rate
o growth rate= 72/#years to double
What is the rule of 72? (Or 70)? How do you use it?
• 72/ growth rate= # years to double
o 10% -> 72/10=7.2
o Doubles in 4 years -> 72/x=4 x=18% per year
How does an increase in saving affect the economy in the long-run? Short run?
• Long-run
o Capital accumulation
o Consumption tax, IRA’s
• Short-run
Explain the idea of Classical/Malthusian theory of economic growth?
o Limited resources(land) leads to diminishing returns and ultimately decline in per capita wages to subsistence levels
Explain the idea of Neo-Classical – Slow Model theory of economic growth?
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)
Explain the idea of Endogenous or New Growth Theory theory of economic growth?
o Explains determinants of technological change and thus growth
Explain the idea of Creative Destruction theory of economic growth?
o Revolutionizes the economic structure from within, incessantly destroying the old one which can cause progress and improve standards of living
What’s wrong with Malthus’ law? (Why hasn’t it held for developed countries?)
• 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
