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?
(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)
Why does Productivity matter in 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
What is the role of Political structure and property rights in economic growth?
o Interplay of economic and political freedom
o Stake in system results in work harder
What is the role of Human Capital in economic growth?
o Determinant in labor productivity, results in growth
What is the role of Capital in economic growth?
o Investment in capital increases productivity
What is the role of Savings in economic growth?
o Higher saving higher steady state Y/L (output per worker)
What is the role of Education in economic growth?
o Increases human capital which increases productivity
What is the role of Natural Resources in economic growth?
o Part of the production function
• Production function
(defines marginal product and to distinguish allocative efficiency)
• Y=Af
What is the role of Industrial Policy in economic growth?
o Government planning
• Does not increase LR growth
What is the role of Population Growth in economic growth?
o Might cause economic growth
• Malthus’ Law: Population grow geometrically, food arithmetically
What is the role of Research and development in economic growth?
o Important to economic growth
o Knowledge public good
o Internalize externalize with patents
What is the role of Taxes in economic growth?
o Less likely better
o Perhaps consumption tax
What is the role of Free Trade in economic growth?
o Encouraged
o Comparative advantage
What is the role of Trickle down economics in economic growth?
o Pro-business/ pro-rich policies will eventually benefit the non-rich
o Helps the rich crumbs down to the rest
What is the role of Government Budget deficits in economic growth?
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 – Solow 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 Endogeneous or New Growth 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
