Economic Growth Flashcards
Real GDP/person
Measure of Living Standards
- Varies widely from Country to Country + over time
Define Growth Rate
Growth in Real GDP
Why does ranking of countries by Income change substantially over time?
Due to Differences in Growth Rates
What is LR/Trend Growth?
1% Change in a country’s Growth Rate can make a significant difference in LR due to Compounding
What is the Business Cycle?
SR or Cyclical movements in Growth Rate
What are the 3 main theories fro the determinant of LR Economic Growth?
- Neoclassical Theory
- Endogenous Growth Theory
- Trade
What is the Neoclassical Theory?
Role of Productivity in Growth
–> Solow Exogenous Growth model
What is the Endogenous Growth Theory?
Investment in Human Capital- key driver for Growth
Define Productivity
Quantity of G+S produced from each unit of Labou Input
What is Productivity a Key Determinant of?
Living Standards
What is Growth in Productivity a Key Determinant of?
Growth in Living Standards
What are the 4 main Determinants of Productivity?
- Physical Capital
- Human Capital
- Natural Resources
- Technological Knowledge
Define Physical Capital
Stock of Equipment + Structures used to produce G+S
What is Physical Capital based on?
Previous Investments- Capital is a produced FoP
Define Human Capital
Knowledge + Skills workers acquire through Education, Training + Experience
–> Less Tangible than Physical capital
Define Natural Resources
Inputs into Production of G+S provide by Nature
What must we distinguish between with Natural Resources?
Renewable + Non-Renewable
Define Technological Knowledge
Society’s Understanding of the Best Production methods for G+S
What is the Aggregate Production Function?
Y = AF( L, K, H, N )
- Y = Output
- A - Reflects Available Production Technology
- F() - function shows how Inputs are combined to produced Outputs
- L = Labour
- K = Capital
- H = Q of human Capital
- N = Q of Natural Resources
What does a Society’s SoL depend on?
It’s ability to Produce G+S
–> Productivity depends on Physical Capital
What is Capital Investment?
Increases in K
–> Save more + Invest more Current Resources in Production of Capital for Future use
What is the Opportunity Cost of Capital Investment?
Must Consume less + Save more Current Income
Define Diminishing Returns
Benefit from Extra Unit of an Input declines as Quantity of Input Increases
In LR- what do Higher Savings rates lead to?
Increased Investments + Capital
- BUT effect will be a Decreasing Increase in Output
What is the Catch-up Effect?
Countries that start Poor tend to Grow Faster than Richer countries
Why do Poor Countries tend to Grow faster than Rich countries?
Low Productivity- Small Capital Investment –> Large Increase in worker’s Productivity
- e.g. China + Japan
What is Human Capital Investment + what is its effect?
Education + Training–> Increased Productivity
–> Increased Output/capita
What is the Gov. Role in Human Capital Investment?
- Public Education
- Subsidies to Educate Workers
What is the main Problem for Poor Countries growth?
Brain Drain- Loss of Skilled Labour
- e.g. Greece
How does Human Capital help with Health + Productivity?
Investments –> Healthier Population –> Higher Productivity
What is the impact of Healthier workers?
Higher Productivity –> Higher Output
– Less Sick days
What is R&D?
New Ideas + Technologies
How can the Gov. encourage R&D?
- Through Publicly operated Research Institutes
- Grants etc.
- Enforce Patents- Increased Incentive for R&D
What is the potential issue with Patents?
Can prevent others from Innovating –> Less Innovation
What are 2 other determinants of Growth?
FDI + FPI
Define FDI
Capital Investment owned + operated by a Foreign entity
Define FPI
Investment Financed with foreign money but Operated by Domestic Residents
What are the 3 main Benefits of Foreign Investments?
- Money may Flow Back to Capital owners
- Higher Productivity + Wages
- Way to learn about new Technology
What Institutions are Necessary to foster Econ. Growth?
- Protect Property Rights- Courts enforce Property Rights
- Promote Political Stability
Why are Lack of Property Rights a major Problem for Growth?
- Contracts are hard to enforce
- Fraud goes Unpunished
- Corruption: –> Impedes Coordinating Power of Markets
–> Discourages Domestic Saving
–> Discourages FDI + FPI
Latter also caused by Political Instability
Why may Population Growth be a Good thing?
Increased Population –> More workers to produce G+S –> Increased GDP
What is the Issue with Population Growth?
Does NOT Necessarily Increase GDP/capita
–> Dilutes Capital Stock- Lowers Productivity/worker
–> Increases Pressure on Natural Resources
Therefore- Lower Pop. Growth may be a Good thing
