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EC316 > Growth > Flashcards

Growth Flashcards

1
Q

The graph of relative importance of trend growth and business cycle

A
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2
Q

Why is growth important, and how do we measure it

A

-Because we care about the standard of living
-The variable we want to focus on and compare either over time or
across countries is output per capita, ie. GDP/population, rather than
output itself.

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3
Q

How do you make growth comparisons across countries ?

A
  • To make figures comparable across countries we could just use the
    current exchange rate to convert the figures to a common currency (eg.
    US$)
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4
Q

Why cant you just use the basic exchange rate when making growth comparisons across countries ??

A

exchange rates can vary a lot (more than relative standards of
living);
also, the market exchange rate will not reflect relative prices of non-traded products, such as housing, food and many basic services.

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5
Q

So what is the best way to make growth comparisons accross countries ??

A

To compare GDP, it is best to use a common set of prices for all countries

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6
Q

What do the adjusted GDP numbers aim to take into account

A
  • How purchasing power differs across countries
    -These adjusted numbers are called PURCHASING POWER PARITY (PPP)
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7
Q

Life satisfaction and GDP per capita

A
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8
Q

How do you measure economic growth from 2011 to 2012

A
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9
Q

How do you measure economic growth over a certain amount of years

A
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10
Q

What does convergence mean empirically?

A

-The levels of income per capita should coincide in the long run
-Lower income nations should grow faster than high income nations

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11
Q

OECD Convergence

A
  1. This levels of convergence has also been observed in the OECD
  2. Again countries with lower levels of output per person have typically grown faster since 1950

Convergence is not observable in all groups of countries

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12
Q

Summary on convergence

A

-Nearly all countries with high levels of output per person show clear evidence of convergence
-not the rule in Africa
-The 4 asian tigers have started to catch up with japan
-

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13
Q

Growth as a primer

A

Based on Robert Solow’s model and 2 equations
1. A production function
2. Capital accumulation equation

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14
Q

What does the aggregate production function show us ?

A

-This shows the relationship between aggregate output and the inputs

Y = F(K,N)

Y = Aggregate output
K = capital, i.e. the sum of all the machines, plants and office buildings
N = Labour (The number of workers in the economy)

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15
Q

What does the function F(.) tell us ?

A

How much output is produced for given quantities of capital and labour and depends on the STATE OF TECHNOLOGY

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16
Q

What is THE STATE OF TECHNOLOGY

A

-It is a set of blue prints defining the range of products and the techniques available to produce them.

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17
Q

What is Returns to scale

A

-It is a property of the economy in which, if the scale of operation is doubled (That is, if the quantities of capital and labour are doubled) Then output will also be double

2Y = F(2K, 2L)

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18
Q

What is Returns to factors

A

-What would happen if only one of our inputs increased ??

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19
Q

What does returns to capital refer to ??

A

refers to the property that increases in capital lead to smaller and smaller increases in output as the level of capital increases.

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20
Q

What does decreasing returns to labour refer to ?

A

refers to the property that increases
in labour, given capital, lead to smaller and smaller increases in
output as the level of labour increases.

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21
Q

What is the production function in intensive form?

A

The amount of output per worker, Y/N depends on the capital per worker, K/N
As capital per worker increases so does output

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22
Q

What are the 2 main determinants of output in the long run ??

A
  1. The amount of capital (PRODUCTION FUNCTION) determines the amount of output being produced
  2. The amount of output (CAPITAL ACCUMULATION FUNCTION) detrmines the amount of saving and, in turn, the amount of capital accumulated over time
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23
Q

In a diagram what are the interactions between output and capital

A
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24
Q

The effect of capital on output

A

Again the amount of capital determines output, the production function shows this

Y= F(K,N)

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25
Q

What are sources of growth?

A

-An increase in output per worker (Y/N) can come from an increase in capital per worker (K/N), this is capital accumulation

-An increase can also come from technological progress, improvements in the state of technology that shift the production function

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26
Q

What does this graph show ?

A

The effect of capital accumulation on growth
- Successive equal increases in capital per
worker lead to smaller and smaller increses
in output per worker

27
Q

What does the change to F(K,N, 1)’ show ??

A
  • How an improvement in technology can impact growth
    -An increase in technology pivots the production function outward leading to an increase in output per worker for every given level of capital per worker
28
Q

What are key points when looking at sources of growth ??

A
  • CAPITAL ACCUMULATION by itself cannot sustain growth, due to the decreasing returns to scale

-Sustained growth requires sustained technological progress

-The economy’s rate of growth of output per person is eventually determined by the economy’s rate of technological progress

29
Q

What are key assumptions when looking at capital accumulation ?

A

-The size of the population, the participation rate and the unemployment rate are all constant
-There is no technological progress

30
Q

In a graph show how capital determines output

A
31
Q

Does output have an effect on saving and investment ??

A

YES

32
Q

What 3 assumptions are made to derive the relation between output and investment

A
  1. Assume dealing with a closed economy, so Y = C+I+G
    (Output = consumption + investment + government expenditure)
  2. Public saving is = to 0
    T-G=0
  3. Private saving is proportional to income, so S=sY, where 0<s<1
33
Q

How do you prove that Investment is proportional to output ?

A
34
Q

Show the graph for investment per worker

A

The curve for the investment per worker has the same shape as the production function, except it is lower by a factor of S (Savings)

35
Q

What is investment ?

A

Investment is the flow of new plant and machinery built during period t

36
Q

What is Capital

A

Capital (Kt) is the stock of existing plant and machinery available for use in period t

37
Q

What is depreciation?

A

Capital depreciates at a rate of DELTA per year

DELTA Kt is a fraction of Kt which is lost

38
Q

Taking into account depreciation, what is the evolution of the capital stock ?

A
39
Q

What is the capital accumulation function ??

A

Change in the capital stock = investment - depreciation

40
Q

Can you summarise the capital accumulation function

A

It is based on 2 key relations
1. That capital determines output
2. Output determines capital accumulation

41
Q

At which point is capital stock per worker at its steady state ??

A

At point C, investment per worker exactly offsets depreciation and the capital stock per worker is at its steady state

42
Q

The change in capital per worker from this year
to next year depends on the difference between two terms, what are they ??

A

If investment per worker exceeds depreciation per worker, the change in capital per worker is positive

43
Q

Why does the economy always end up at the steady state ??

A

-To the left of the steady state, where investments exceeds depreciation, so capital stock increases
-To the right depreciation exceeds investment so capital stock decreases
-Once steady state is reached, investment=depreciation, there is no pressure on the capital stock to increase or decrease

44
Q

In the steady state how does this equation change??

A

-By definition, output per worker and capital per worker and no longer changing, so the LHS of the equation = 0
-Given the steady state of capital per worker (K/N), the steady-state value of
output per worker (Y/N), is then given by the production function

45
Q

Can you provide an example of how the steady state model works(war)

A

-In a war, if a countries capital losses exceed population losses it will come out of the war at a point left of k*/N (Investments exceeds depreciation)
-Investment from this point will result in massive growth, until converging back to the steady state

46
Q

The french example of growth

A
47
Q

How can a saving rate affect growth ??

A

-If production function exhibits decreasing returns to capital, an increase in the saving rate can only affect growth temporarily
-In the long run, saving does not affect growth but does affect the level of output per worker

48
Q

Explain these graphs

A

-The 2 graphs are comparing 2 countries steady states of capital per worker
-Also showing the different saving rates each country has
-The Solow model can also explain differences in standard of living (GDP per worker) by differences in savings rates

49
Q

What are some implications that come with an increase in the saving rate ??

A
  1. The saving rate has no effect on the long run growth rate of output per worker which, with no technological progress, is equal to zero.
  2. Nonetheless, the saving rate determines the steady state level of output per worker, that is the long-run level of output per worker.
    Other things equal, countries with a higher saving rate will achieve higher output per worker in the long run.
  3. An increase in the saving rate will lead to higher growth of output per worker for some time, but not forever, due to decreasing returns.
50
Q

What is the golden rule of capital per worker ??

A

-Make consumption per worker as high as possible
-If the capital stock is too high, output is used to maintain an overlylarge capital stock, consumption is low.
-If the capital stock is too low, output is used to support consumption,
capital is too low to produce sufficient output

51
Q

Draw a graph to show the golden rule of capital

A
  • In order to maximise C/N, choose K/N to maximise the distance between investment and depreciation
52
Q

Mathematically what level does K/N need to be set at ??

A

Set at a level at which the slope of the output production function is = the slope of the depreciation line

53
Q

Looking at the golden rule steady state, what happens with increases in steady-state capital on either side of the golden rule ??

A

-Below the golden-rule, any increases in the steady-state capital raises steady-state consumption
-Above the golden-rule, any increases in the steady-state capital decreases consumption

54
Q

What effect does the saving rate have on the steady-state consumption per worker ??

A

-An increase in the saving rate leads to an increase and then to a decrease in steady-state consumption

55
Q

The level of capital associated with the value of the saving rate that yields the highest level of consumption in steady state is known as what ??

A

The golden-rule level of capital

56
Q

How can policy makers effect a change in the saving rate ??

A
  1. Public saving, via a budget surplus (T>G+rB)
    Where rB is payments on interest
  2. Influence private selling, raise real rate of return payable to savers - via tax exemptions on savings
57
Q

Should policy makers try and raise the saving rate ??

A

The answer is yes, unless the economy is operating above the golden rule level of K/N, consumption per worker will increase if the saving rate increases

58
Q

What are the key differences between physical and human capital ??

A

-The set of skills a worker has is called human capital
-An economy with more skilled workers is likely to be much more productive than an economy with less

59
Q

What are some key details about human capital ??

A

-Its the skills and knowledge that accumulate over time
-It increases labour productivity
-this increasing means more output
-Higher steady state level of output and capital
-May explain cross-country differential growth

60
Q
A

An increase in how much society ‘saves’ in the form of human capital—through education and on-the-job- training—increases steady-state human capital per worker, which leads to an increase in output per worker.

61
Q

When including human capital per worker (H/N) into the production function what will it be written as ??

A

An increase in capital per worker or the average skill of workers leads to an increase in output per worker.

62
Q

What is a exogenous growth model ?

A

The Solow model is an example of an exogenous growth model, as sustained growth comes with technological progress which is determined outside of the model

63
Q

What is the relation between education and economic growth ??

A

-An increase in how much society ‘saves’ in the form of human capital—through education and on-the-job- training—increases steady-state human capital per worker, which leads to an increase in output per worker

-In the long run, Y/N depends on not only how much society saves but also how much it spends on education

64
Q

What is an Endogenous growth model ?

A

These are models that generate steady growth even without technological progress, growth in these models depends on variables such as the rate of spending on education.

A better educated workforce can result in a higher level of technological progress

EC316 (7 decks)

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