Economics - Growth

Question 1

Purchasing power parity (PPP)

Answer 1

The idea that exchange rates move to equalize the purchasing power of different currencies.

Question 2

Potential GDP

Answer 2

The maximum amount of output an economy can sustainably produce without inducing an increase in the inflation rate. The output level that corresponds to full employment with consistent wage and price expectations.

Question 3

Grinold-Kroner (2002) decomposition of the return to equity

Answer 3

= dy + Δ(P/E) + i + g + ΔS
= dividend yield + expected repricing + inflation rate + real economic growth + change in shares outstanding

ΔS = nbb + rd
nbb = Net buybacks
rd = the greater the divergence between economic growth in the economy as a whole and the earnings growth of companies listed on the stock market

Question 4

Total factor productivity

Answer 4

A multiplicative scale factor that reflects the general level of productivity or technology in the economy. Changes in total factor productivity generate proportional changes in output for any input combination.

Question 5

two-factor aggregate production function

Answer 5

Y = AF(K,L)
F(K,L) = K^(α) L^(1-α)

Question 6

marginal product of capital (MPK)

Answer 6

MPK = αAK^(α−1)L^(1−α) = αY/K.

Question 7

Rental price of capital

Answer 7

The cost per unit of time to rent a unit of capital.
r = αY/K

Question 8

Labor productivity

Answer 8

y = Y/L = A(K/L)^(α)(L/L)^(1−α) = Ak^(α)

Question 9

Cobb Douglas’ diminishing marginal productivity

Answer 9

A value of α close to zero means diminishing marginal returns to capital are very significant and the extra output made possible by additional capital declines quickly as capital increases. In contrast, a value of α close to one means that the next unit of capital increases output almost as much as the previous unit of capital.

Question 10

Growth accounting equation

Answer 10

The production function written in the form of growth rates. For the basic Cobb–Douglas production function, it states that the growth rate of output equals the rate of technological change plus α multiplied by the growth rate of capital plus (1 − α) multiplied by the growth rate of labor.

ΔY/Y = ΔA/A + αΔK/K + (1 − α)ΔL/L  

Question 11

Labor productivity growth accounting equation

Answer 11

States that potential GDP growth equals the growth rate of the labor input plus the growth rate of labor productivity.

Growth rate in potential GDP = Long-term growth rate of labor force   + Long-term growth rate in labor productivity

Question 12

Expanded production function

Answer 12

Y = AF(N,L,H,KIT,KNT,KP)

Raw materials: natural resources such as oil, lumber, and available land (N)

Quantity of labor: the number of workers in the country (L)

Human capital: education and skill level of these workers (H)

Information, computer, and telecommunications (ICT) capital: computer hardware, software, and communication equipment (KIT)

Non-ICT capital: transport equipment, metal products and plant machinery other than computer hardware and communications equipment, and non-residential buildings and other structures (KNT)

Public capital: infrastructure owned and provided by the government (KP)

Technological knowledge: the production methods used to convert inputs into final products, reflected by total factor productivity (A)

Question 13

Capital deepening

Answer 13

An increase in the capital-to-labor ratio.

At the point at which the marginal product of capital equals its marginal cost, profit maximizing producers will stop adding capital

Question 14

Dutch disease

Answer 14

A situation in which currency appreciation driven by strong export demand for resources makes other segments of the economy (particularly manufacturing) globally uncompetitive.

Question 15

Labor force (labor quantity)

Answer 15

Everyone of working age (ages 16 to 64) who either is employed or is available for work but not working.

growth in the labor input depends on four factors: population growth, labor force participation, net migration, and average hours worked

Question 16

Labor force participation rate

Answer 16

The percentage of the working age population that is in the labor force.

Question 17

Human capital (labor quality)

Answer 17

An implied asset; the net present value of an investor’s future expected labor income weighted by the probability of surviving to each future age. Also called net employment capital.

Question 18

Network externalities

Answer 18

The impact that users of a good, a service, or a technology have on other users of that product; it can be positive (e.g., a critical mass of users makes a product more useful) or negative (e.g., congestion makes the product less useful).

Question 19

equilibrium output-to-capital ratio formula

Answer 19

YK={(1/s)[(θ/(1−α)]+δ+n}≡Ψ
s = fraction of income saved
θ = the growth rate of TFP i.e. ∆A/A
α = elasticity of output with respect to capital
δ = physical capital stock depreciation
n = labor supply growth

Question 20

Steady-state equilibrium ratio (savings/investment version)

Answer 20

sy={[θ/(1−α)]+δ+n}k
Savings and gross investment per worker is equal to necessary growth rate for new workers (n), replace PPE (δ), and deepen capital stock (physical capital stock)

Question 21

Neoclassical model parameters

Answer 21

(s and y) Savings rate - shifts the curve directly proportional
(n) Labor force growth - shifts the curve negatively proportional
(δ) Depreciation rate growth - shifts the curve negatively proportional
(θ) TFP growth - steepens the curve slope

Question 22

Endogenous growth model

Answer 22

y = f(k) = ck
y = output per worker
k = stock of capital per worker
c = constant marginal product of capital in the economy (output to capital ratio)

Growth rate of per capita income
∆y/y = sc − δ − n

Question 23

Absolute convergence

Answer 23

The idea that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.

Per capita growth rate, not level of per capita income

Question 24

Conditional convergence

Answer 24

The idea that convergence of per capita income is conditional on the countries having the same savings rate, population growth rate, and production function.

Same level of per capita output

there should be an inverse relation between the initial level of per capita real GDP and the growth rate in per capita GDP

Question 25

Club convergence

Answer 25

The idea that only rich and middle-income countries sharing a set of favorable attributes (i.e., are members of the “club”) will converge to the income level of the richest countries.

Question 26

Non-convergence trap

Answer 26

A situation in which a country remains relatively poor, or even falls further behind, because it fails to implement necessary institutional reforms and/or adopt leading technologies.

Question 27

Growth rate in potential GDP using labor productivity method

Answer 27

= Long-term growth rate of labor force + Long-term growth rate in labor productivity

Question 28

Growth rate in potential GDP using growth accounting method

Answer 28

= α∆K/K + (1 − α)∆L/L + ∆A/A
First term - capital
Second term - labor
Third term -TFP

Question 29

steady-state growth rate in the neoclassical model

Answer 29

ΔY/Y = (θ)/(1 − α) + n = Growth rate of TFP scaled by labor factor share + Growth rate in the labor force