Economic Growth

Question 1

Real GDP/person

Answer 1

Measure of Living Standards

- Varies widely from Country to Country + over time

Question 2

Define Growth Rate

Answer 2

Growth in Real GDP

Question 3

Why does ranking of countries by Income change substantially over time?

Answer 3

Due to Differences in Growth Rates

Question 4

What is LR/Trend Growth?

Answer 4

1% Change in a country’s Growth Rate can make a significant difference in LR due to Compounding

Question 5

What is the Business Cycle?

Answer 5

SR or Cyclical movements in Growth Rate

Question 6

What are the 3 main theories fro the determinant of LR Economic Growth?

Answer 6

• Neoclassical Theory
• Endogenous Growth Theory
• Trade

Question 7

What is the Neoclassical Theory?

Answer 7

Role of Productivity in Growth

–> Solow Exogenous Growth model

Question 8

What is the Endogenous Growth Theory?

Answer 8

Investment in Human Capital- key driver for Growth

Question 9

Define Productivity

Answer 9

Quantity of G+S produced from each unit of Labou Input

Question 10

What is Productivity a Key Determinant of?

Answer 10

Living Standards

Question 11

What is Growth in Productivity a Key Determinant of?

Answer 11

Growth in Living Standards

Question 12

What are the 4 main Determinants of Productivity?

Answer 12

1. Physical Capital
2. Human Capital
3. Natural Resources
4. Technological Knowledge

Question 13

Define Physical Capital

Answer 13

Stock of Equipment + Structures used to produce G+S

Question 14

What is Physical Capital based on?

Answer 14

Previous Investments- Capital is a produced FoP

Question 15

Define Human Capital

Answer 15

Knowledge + Skills workers acquire through Education, Training + Experience
–> Less Tangible than Physical capital

Question 16

Define Natural Resources

Answer 16

Inputs into Production of G+S provide by Nature

Question 17

What must we distinguish between with Natural Resources?

Answer 17

Renewable + Non-Renewable

Question 18

Define Technological Knowledge

Answer 18

Society’s Understanding of the Best Production methods for G+S

Question 19

What is the Aggregate Production Function?

Answer 19

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

Question 20

What does a Society’s SoL depend on?

Answer 20

It’s ability to Produce G+S

–> Productivity depends on Physical Capital

Question 21

What is Capital Investment?

Answer 21

Increases in K

–> Save more + Invest more Current Resources in Production of Capital for Future use

Question 22

What is the Opportunity Cost of Capital Investment?

Answer 22

Must Consume less + Save more Current Income

Question 23

Define Diminishing Returns

Answer 23

Benefit from Extra Unit of an Input declines as Quantity of Input Increases

Question 24

In LR- what do Higher Savings rates lead to?

Answer 24

Increased Investments + Capital

- BUT effect will be a Decreasing Increase in Output

Question 25

What is the Catch-up Effect?

Answer 25

Countries that start Poor tend to Grow Faster than Richer countries

Question 26

Why do Poor Countries tend to Grow faster than Rich countries?

Answer 26

Low Productivity- Small Capital Investment –> Large Increase in worker’s Productivity
- e.g. China + Japan

Question 27

What is Human Capital Investment + what is its effect?

Answer 27

Education + Training–> Increased Productivity

–> Increased Output/capita

Question 28

What is the Gov. Role in Human Capital Investment?

Answer 28

• Public Education

- Subsidies to Educate Workers

Question 29

What is the main Problem for Poor Countries growth?

Answer 29

Brain Drain- Loss of Skilled Labour

- e.g. Greece

Question 30

How does Human Capital help with Health + Productivity?

Answer 30

Investments –> Healthier Population –> Higher Productivity

Question 31

What is the impact of Healthier workers?

Answer 31

Higher Productivity –> Higher Output

– Less Sick days

Question 32

What is R&D?

Answer 32

New Ideas + Technologies

Question 33

How can the Gov. encourage R&D?

Answer 33

• Through Publicly operated Research Institutes
• Grants etc.
• Enforce Patents- Increased Incentive for R&D

Question 34

What is the potential issue with Patents?

Answer 34

Can prevent others from Innovating –> Less Innovation

Question 35

What are 2 other determinants of Growth?

Answer 35

FDI + FPI

Question 36

Define FDI

Answer 36

Capital Investment owned + operated by a Foreign entity

Question 37

Define FPI

Answer 37

Investment Financed with foreign money but Operated by Domestic Residents

Question 38

What are the 3 main Benefits of Foreign Investments?

Answer 38

• Money may Flow Back to Capital owners
• Higher Productivity + Wages
• Way to learn about new Technology

Question 39

What Institutions are Necessary to foster Econ. Growth?

Answer 39

• Protect Property Rights- Courts enforce Property Rights

- Promote Political Stability

Question 40

Why are Lack of Property Rights a major Problem for Growth?

Answer 40

• 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

Question 41

Why may Population Growth be a Good thing?

Answer 41

Increased Population –> More workers to produce G+S –> Increased GDP

Question 42

What is the Issue with Population Growth?

Answer 42

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