Economic Growth

Question 1

When can Real GDP increase for two distinct reasons?

Answer 1

1. The economy might be returning to full employment in an expansion phase of the business cycle
2. Potential GDP might be increasing

Question 2

What is output growth? per-capita output growth? productivity growth?

Answer 2

1. output growth is the growth rate of the output of the entire economy
2. per-capita output growth is the growth rate of output per person in the economy
3. productivity growth is the growth rate of output per worker

Question 3

Explain variables in Y = F(A,K,L)

Answer 3

Y: real GDP = constant dollar (inflation-adjusted) value of all goods and services produced

K: physical capital stock = constant dollar value of private, non-residential fixed assets

L: labor force

A: total factor productivity = production unaccounted for by capital or labor

Question 4

An increase in GDP can come about through

Answer 4

1. An increase in the labor supply
2. An increase in physical or human capital
3. An increase in productivity (the amount of product produced by each unit of capital or labor)

Question 5

What are the two main determinants of labor productivity?

Answer 5

1. the quantity of capital available to workers

2. level of technology

Question 6

How to calculate real wage?

Answer 6

real wage = wage / price level

Question 7

Examples of growth-improving policies

Answer 7

1. enhance property rights, rule of law
2. improve health and education
3. promote technological change
4. promote saving and investment (for example, new factories, capital is machine)