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?

Answer 3

(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)

Question 4

Why does Productivity matter in economic growth?

Answer 4

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 5

What is the role of technology in economic growth?

Answer 5

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

Question 6

What is the role of Political structure and property rights in economic growth?

Answer 6

o Interplay of economic and political freedom

o Stake in system results in work harder

Question 7

What is the role of Human Capital in economic growth?

Answer 7

o Determinant in labor productivity, results in growth

Question 8

What is the role of Capital in economic growth?

Answer 8

o Investment in capital increases productivity

Question 9

What is the role of Savings in economic growth?

Answer 9

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

Question 10

What is the role of Education in economic growth?

Answer 10

o Increases human capital which increases productivity

Question 11

What is the role of Natural Resources in economic growth?

Answer 11

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

Question 12

What is the role of Industrial Policy in economic growth?

Answer 12

o Government planning

• Does not increase LR growth

Question 13

What is the role of Population Growth in economic growth?

Answer 13

o Might cause economic growth

• Malthus’ Law: Population grow geometrically, food arithmetically

Question 14

What is the role of Research and development in economic growth?

Answer 14

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

Question 15

What is the role of Taxes in economic growth?

Answer 15

o Less likely better

o Perhaps consumption tax

Question 16

What is the role of Free Trade in economic growth?

Answer 16

o Encouraged

o Comparative advantage

Question 17

What is the role of Trickle down economics in economic growth?

Answer 17

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

Question 18

What is the role of Government Budget deficits in economic growth?

Answer 18

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 19

How do you calculate growth rates?

Answer 19

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

Question 20

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

Answer 20

• 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 21

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

Answer 21

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

Question 22

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

Answer 22

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

Question 23

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

Answer 23

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 24

Explain the idea of Endogeneous or New Growth theory of economic growth?

Answer 24

o Explains determinants of technological change and thus growth

Question 25

Explain the idea of Creative Destruction theory of economic growth?

Answer 25

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

Question 26

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

Answer 26

• 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