ENRE 1. Economic growth & the environment: Introduction

Question 1

Economic growth graphic

Answer 1

Question 2

Determinants of economic growth:
How can we explain economic growth?

Answer 2

1. Explanation based on empirical analysis
2. Explanation based on theory

Question 3

– Why do some countries grow faster than others?
– Why do growth rates change over time?

Question 4

Determinants of economic growth:

Answer 4

According to empirical findings for a panel of around 100 countries (1960 -1990) The real per capita GDP growth rate is enhanced by:

1. higher initial schooling and life expectancy
2. lower fertility
3. better maintenance of the rule of law
4. lower inflation
5. improvements in the terms of trade
6. lower initial levels of real per capita GDP

Question 5

In 2010 Germany had a per capita GDP of $ 36,000 while China‘s per capita GDP was $ 4,400. In the previous years, the real per capita economic growth rate was on average 1.5% in Germany and 10% in China.

•If we assume that the growth rates remain on that level, how many years (from 2010 onwards) will it take until China would have reached the same per capita income level as Germany?

Answer 5

26,14 years

Question 6

What does contribute to economic growth?

Answer 6

1-Technological change

• Labour: quality differences
– Different skills
– Learning-by-doing (education)
– Motivation (intrinsic) & fatigue
• Organization / coordination matters
– Congestion at a work site
– Benefits of specialisation
– Motivation (extrinsic)

=> Improvement of technolgy (technological progress) increases output (i.e. it leads to economic growth)

Question 7

What does also contribute to economic growth?

Answer 7

2-Institutions matter:

• Competition between firms increases productivity

– Market economy (versus cetrally planned economy): Incentive to win (sweets) in order to get a prize

– Prize increases motivation for better organisation in firms & more effort by workers

– Information is important: Incentive to copy sucessfull technology from competitors

Question 8

What else ?

Answer 8

3-Population growth contributes to growth:

Higher population (group size increased from 4 to 8 workers) leads to higher total output but may reduce per capita output

• Law of the diminishing marginal returns

4-Capital accumulation contributes to growth

More capital (equipment was doubled) leads to higher total output

• Additional output decreases: Law of the diminishing marginal returns

– limits to growth which is induced by technological change

• Constant returns to scale

Question 9

Theoretical explanation for economic growth (Simplified version of Solow’s Growth Model):
What assupmtions should be made?

Answer 9

Law of diminishing marginal returns

( In case only 1 inputs labour and capital increase together- Assuming no change in Technology)

1 unit labour + 1 unit capital=> 100 units GDP

2 units labour + 1 units capital=> 150 units GDP

Logic behind the law of diminishing marginal returns is that, even if we increase labour by additional units, the increase of capital is necessary to reach a higher GDP.

Question 10

Theoretical explanation for economic growth (Simplified version of Solow’s Growth Model):
What assupmtions should be made?

Answer 10

1. Constant returns to scale:

( In case both inputs labour and capital increase together- Assuming no change in Technology)

1 unit labour + 1 unit capital=> 100 units GDP

2 units labour + 2 units capital=> 200 units GDP

Question 12

Other assumptions related to technology ?

Answer 12

Constant technology: Economic growth only when capital stock grows faster than population

Question 13

How does a Y-K curve look like, when Y refers to capital and K to capital? Draw it and refer to the consumption C0 done at K0

Answer 13

Question 14

How do savings relate to capital?

Does this then over time lead to economic growth?

Answer 14

Savings lead to accumulation of capital, however it is not realsitic that savings induce economic growth, since the initial capital devaluates each year, so savings are needed to maintain the capital stock.

Question 15

• If we assume a fixed depreciation rate D/K= constant; how would the depreciation curve look like if added to the output-capital curve.
• In which point do the savings exactly maintain the capital ?
• So in which interval of capital should we work the best ?

Answer 15

The intersection point between depreciation curve and savings, give us the steady state, where capital is maintained.

Capital endowment will increase if savings are greater than depreciation • Capital endowment will decrease if savings are smaller than depreciation • Growth will stop when D=S (steady state