Final exam Flashcards
Growth is
the steady increase in aggregate output over time
When comparing the standard of living across countries, we use
purchasing power parity (PPP)
purchasing power parity (PPP)
Aggregate production function:
Y is
output
K is
capital
N is
labour
The function F depends on the
state of technology
Constant returns to scale:
Decreasing returns to capital:
Increases in capital, given labour, lead to smaller and smaller increases in output.
Decreasing returns to labor:
Increases in labor, given capital, lead to smaller and smaller increases in output.
Increases in capital per worker:
Movements along the production function.
Improvements in the state of technology:
Shifts (up) of the production function.
Growth comes from
capital accumulation and technological progress
capital accumulation
a higher saving rate
technological progress
the improvement in the state of technology
Decreasing returns to capital: Increases in capital per worker lead to smaller and smaller increases in output per worker.
An improvement in technology shifts the production function up, leading to an increase in output per worker for a given level of capital per worker.
Even if a lower saving rate does not permanently affect the growth rate, it does affect the level of
output and the standard of living
Output, in the long run, depends on two relations:
*The amount of capital determines the amount of output
*The amount of output being produced determines the amount of saving, which in turn determines the amount of capital being accumulated over time.
Interactions between Output and Capital
Higher capital per worker leads to
higher output per worker
The economy is closed:
I = S + (T − G)
Public saving (T − G) is 0:
I = S
Private saving is proportional to income:
S = sY where s is a saving rate, which has a value between 0 and 1
the relation between output and investment:
Investment is proportional to
output
The higher (lower) output is, the higher (lower) is saving and so
the higher (lower) is investment.
The change in the capital stock per worker is equal to
saving per worker minus depreciation:
If investment per worker exceeds (is less than) depreciation per worker, the change in capital per worker is
positive (negative)
When capital and output are low,
investment exceeds depreciation and capital increases.
When capital and output are high,
investment is less than depreciation and capital decreases.
The state in which output per worker and capital per worker are no longer changing is called the
steady state of the economy
The steady-state value of capital per worker is such that the amount of saving per worker is sufficient to cover
depreciation of the capital stock per worker.
The saving rate has no effect on the long-run growth rate of output per worker, which is equal to
zero
The saving rate determines the level of output per worker in the
long run
A country with a higher saving rate
achieves a higher steady-state level of output per worker.
An increase in the saving rate will lead to
higher growth of output per worker for some time, but not forever.
A country with a higher saving rate achieves a higher steady-state level of output per worker.
An increase in the saving rate leads to a period of higher growth until
output reaches its new higher steady-state level.
An increase in the saving rate leads to a period of higher growth until output reaches its new higher steady-state level.
Golden-rule level of capital:
The level of capital associated with the saving rate that yields the highest level of consumption in steady state.
For a saving rate between zero and the golden-rule level, a higher saving rate leads to higher capital per worker, higher output per worker and higher consumption per worker in the long-term.
For a saving rate greater than the golden-rule level, a higher saving rate still leads to higher capital per worker and output per worker, but lower consumption per worker.
Human capital (H):
The set of skills of the workers in the economy built through education and on-the-job training.
As for physical capital (K) accumulation, countries that save more or spend more on education can achieve
higher steady-state levels of output per worker.
Models of endogenous growth:
Steady-state growth in output per worker depends on variables such as the saving rate and the rate of spending on education, even without technological progress.
The price of food is higher in poor countries than it is in rich countries TF
False. Prices of goods, including food, are typically lower in poor countries.
In virtually all the countries of the world, output per person is converging to the level of output per person in the United States TF
False. Output per person is converging across countries but most still lag far behind the United States.
Capital accumulation does not affect the level of output in the long run, only technological progress does TF
False. Capital formation cannot sustain growth alone, but it does contribute to long-term growth.
The aggregate production function is a relation between output on one hand and labour and capital on the other. TF
True.
A higher investment rate can sustain higher growth of output forever. TF
False. The economy will eventually reach a steady state where output per worker does not increase.
The higher the saving rate, the higher consumption in steady state. TF
Uncertain, depends on the saving rate.
Consider the following statement: “The Solow model shows that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. saving rate. Increasing the saving rate wouldn’t have any important effects on the economy.” Explain why you agree or disagree with this statement?
Disagree. An increase in the saving rate does not affect growth in the long run but does increase growth in the short run. In addition, an increase in the saving rate leads to an increase in the long-run level of output per worker. Finally, since the evidence suggests that the U.S. saving rate is below the golden-rule rate, an increase in the saving rate would increase steady-state consumption per worker.
Technological progress can lead to:
The state of technology (A) is a variable that tells us
how much output can be produced from given amounts of capital and labour at any time
The state of technology (A) is a variable that tells us how much output can be produced from given amounts of capital and labour at any time:
AN is the amount of
effective labour
Because of decreasing returns to capital, increases in capital per effective worker lead to
smaller and smaller increases in output per effective worker.
Because of decreasing returns to capital, increases in capital per effective worker lead to smaller and smaller increases in output per effective worker.
Capital per effective worker and output per effective worker converge to
constant values in the long run.
Capital per effective worker and output per effective worker converge to constant values in the long run.
Figure 12.2 The dynamics of capital per effective worker and output per effective worker
The steady state of the economy is such that capital per effective worker and output per effective worker are constant and equal to
When the economy is in steady state, capital per worker and output per worker grow at the rate of
technological progress (gA)
On the balanced growth path (steady state or long run):
An increase in the saving rate leads to
an increase in the steady-state levels of output per effective worker and capital per effective worker.
An increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker.
The increase in the saving rate leads to
higher growth until the economy reaches its new, higher, balanced growth path.
The increase in the saving rate leads to higher growth until the economy reaches its new, higher, balanced growth path.
Most technological progress is the outcome of
firms’ research and development (R&D) activities.
The level of R&D spending depends not only on the fertility of research (how spending on R&D translates into new ideas and new products) but also on the
appropriability of research results (the extent to which firms can benefit from the results of their own R&D).
Patents give a firm
that has discovered a new product the right to exclude anyone else from the production or use of that new product for some time.
Y=
AN
N=
Y/A
employment equals
output divided by productivity
In the short run, output is determined by
the IS and LM relations
An increase in productivity may increase or decrease the
demand for goods
An increase in productivity may increase or decrease the demand for goods. Thus, it may shift the IS curve to the left or to the right. What happens depends on what triggered the increase in productivity in the first place.
There is a strong positive relation between output growth and
productivity growth
There is a strong positive relation between output growth and productivity growth. But the causality runs from output growth to productivity, not the other way around.
In the short run, there is no reason to expect a systematic relation between movements in
productivity growth and movements in unemployment.
In the medium run, if there is a relation between productivity growth and unemployment, it appears to be
inverse relation
Fears of technological unemployment probably come from structural change –
the change in the structure of the economy induced by technological progress
Two economists found that mass layoffs cause enormous
relative earnings declines whether they occur in a recession or an expansion.
Two economists found that mass layoffs cause enormous relative earnings declines whether they occur in a recession or an expansion.
Wage inequality
is largely caused by a steady increase in the demand for high-skilled workers relative to the demand for low-skill workers because:
International trade
Skilled-biased technological progress
International trade:
U.S. firms that employ higher proportions of low-skill workers are increasingly driven out of markets by imports from similar firms in low-wage countries.
Skilled-biased technological progress:
New machines and new methods of production require more and more high skill workers
If the rate of technological progress increases, the investment rate (the ratio of investment to output) must increase to keep capital per effective worker constant. TF
True
In steady state, output per effective worker grows at the rate of population growth. TF
False. The steady-state rate of growth of output per effective worker is zero.
In steady state, output per worker grows at the rate of technological progress. TF
True
Even if the potential returns from research and development (R&D) spending are identical to the potential returns from investing in a new machine, R&D spending is much riskier for firms than investing in new machines. TF
True
In the past three decades, the real wages of low-skill U.S. workers have increased relative to the real wages of high skill workers. TF
False
Technological progress leads to a decrease in employment if, and only if, the increase in output is smaller than the increase in productivity. TF
True
Workers benefit equally from the process of creative destruction.
False, creative destruction make some skill sets outdated.
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How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
An international treaty ensuring that each country’s patents are legally protected all over the world.
This proposal would probably lead to lower growth in poorer countries, at least for a while, but higher growth in rich countries.
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
Tax credits for each dollar of R&D spending.
This proposal would lead to an increase in R&D spending. If fertility did not fall, there would be an increase in the rates of technological progress and output growth.
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
A decrease in funding of government-sponsored conferences between universities and corporations.
Presumably, this proposal would lead to a (small) decrease in the fertility of applied research and therefore to a (small) decrease in growth.
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
The elimination of patents on breakthrough drugs, so the drugs can be sold at a low cost as soon as they become available.
This proposal would reduce the appropriability of drug research. Presumably, there would be a reduction in the development of new drugs, a reduction in the rate of technological progress, and a reduction in a growth rate.
Where does technological progress come from for the economic leaders of the world?
The economic leaders typically achieve technological progress by generating new ideas through R&D.
(Where does technological progress come from for the economic leaders of the world?) «A
Do developing countries have other alternatives to the sources of technological progress you mentioned in part (a)?
Developing countries can import technology from the economic leaders by copying this technology or by receiving a transfer of technology as a result of joint ventures with firms headquartered in the economic leaders. Even in the absence of technology transfer, foreign direct investment (FDI) can increase technological progress in the host country by substituting more productive foreign production techniques for less efficient domestic ones.
Do you see any reasons developing countries may choose to have poor patent protection? Are there any dangers in such a policy (for developing countries)?
Poor patent protection may facilitate a more rapid adoption of new technologies in developing countries. The costs of such a policy are relatively small, since developing countries generate relatively few new technologies.
Openness in goods markets:
The ability of consumers and firms to choose between domestic goods and foreign goods. Even countries most committed to free trade have tariffs (taxes on imported goods) and quotas (restrictions on the quantity of goods that can be imported).
The real exchange rate, the price of euro area goods in terms of UK goods, is
real exchange rate
The real exchange rate, the price of euro area goods in terms of UK goods, is
The nominal
and the real exchange rates between the euro and the pound have moved largely together.
In an open economy, the demand for domestic goods is
the value of imports in terms of domestic goods
J-curve: The adjustment process in the trade balance in response to a real depreciation.
A depreciation initially increases the trade deficit and, over time, exports increase and import decrease, reducing the trade deficit.
Assume that the price of Cadillac, produced in the US, is $80,000, while the price of Porsche, produced in Germany, is €100,000. Nominal exchange rate is €1 = $1.5. Calculate the real exchange rate, i.e. the price of euro area goods in terms of US goods.
