Economic growth

Question 1

Rule of 70

Answer 1

70/production growth rate = roughly how long figure will take to double

Question 2

Growth theory

Answer 2

Economic growth trends will occur over a long period of time, these are measured in %

Question 3

Trend growth =

Answer 3

(GDP2 - GDP1)/GDP1 x 100

Question 4

What determines trend growth over time?

Answer 4

• Human + physical capital
• Population growth
• Macroeconomic stability
• Trade policy
• Nature and quality of firms
• Violence, war + conflict
• Geographic factors
• International markets

Question 5

An economies income = it’s output

Answer 5

Nation will have higher standard of living if it can produce a large number of goods and services

Question 6

GDP of a country =

Answer 6

f (capital x labour)

Question 7

Law of diminishing MP =

Answer 7

MPl = Change in GDP/Change in labour

How much GDP will be affected by a change in the amount of labour available

Question 8

Marginal product of capital =

Answer 8

MPk = Change in GDP/Change in capital

How much GDP would be affected by a change in capital

Question 9

Ave. labour productivity =

Answer 9

Y/L = f(K/L x 1)

Output per worker

Question 10

Productivity will rise if….

Answer 10

….capital stock increases but due to law of diminishing MP the rate of increase will decline as capital stock per worker increases
- Growth is dependent on capital stock per worker and ave labour productivity

Question 11

Savings determine investment:

Answer 11

• If population increases and capital stock is not replaced then the capital/labour ratio will decline
• Gross investment = Total spent on capital stock
• Net ‘’ = Total spent on capital - Total spent on replacement
  = Rate of depreciation + population growth = Needed investment growth

Question 12

Determinants of productivity:

Answer 12

1. Physical capital
2. Human capital
3. Natural resources
4. Technological knowledge

Question 13

1. Physical capital

Answer 13

= Intermediate goods

• More/better quality allow for work to be completed quicker and more accurately
• The more physical capital produced now, the higher production will be in future

Question 14

2. Human capital

Answer 14

= The knowledge + skills workers acquire through education, training, and experience

• Raises ability to produce goods/services
• Is also a ‘produced’ factor of production

Question 15

3. Natural resources

Answer 15

= Inputs into production provided by nature

• Renewable (trees) or non-renewable (oil)
• Important but not necessary due to international trade

Question 16

4. Technological knowledge

Answer 16

= Understanding of the most efficient way to produce goods/services

• Can be common knowledge or privileged
• Human capital = time spent transmitting this to labour force
• Technological progress is a requirement for growth + can counterbalance the effects of diminishing MP

Question 17

Production function =

Answer 17

Y/L = rate of technological progress x (K/L x 1)

• Even if labour:capital stays constant productivity can increase
• Production function will shift up to reflect ability to produce more of every good