Growth, Capital accumulation, and the economics of Ideas Flashcards
Why do countries that are catching up have enormous advantages?
To become rich, they don’t need to invent new ideas, technologies, or else. All it has to do is adopt the ideas already developed in richer countries.
What’s a production function?
A production function expresses a relationship between output and the factors of production. namely the exact way in which more inputs will produce more outputs.
Write down the production function, and explain it’s components:
Y = F(A, K, eL)
Y = Output (GDP)
A = Productivity of capital and labour
K = Physical capital
eL = Human capital, or education x Labor (eL)
Explain marginal product of capital
Economists call the increase in output when capital increases by one unit the marginal product of capital.
What’s the reason behind marginal product of capital diminishing?
The first unit of capital is applied where it is most productive, the second unit is applied to slightly less productive tasks, because the first unit is already performing the most productive task, the third unit is applied to even less productive tasks, and so on.
Explain the steady state:
When Investments are equal to depreciation, the capital stock and output are constant, also known as the steady state.
Why can long run economic growth not be due to capital accumulation?
The economy will move towards a steady state in which there is no capital accumulation.
What happens when investment is less than depreciation in the solow model?
When investment is less than depreciation, the capital stock shrinks.
Why will countries with a higher rate of investment be wealthier?
An increase in the investment rate increases a country’s steady state level of GDP.
How will the growth of a country be affected when a country’s capital stock is below its steady state value?
The country will grow rapidly as it invests in capital that has a high marginal product.
Explain conditional convergence
This is the tendency for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income.
The Solow model predicts zero economic growth in the long run. What doesn’t this model account for?
Better ideas let us produce more output from the same inputs of physical and human capital.
Why aren’t there enough good ideas?
Spill overs of ideas mean that the originator of an idea doesn’t get all the benefits. And if the originator doesn’t get enough of the benefits, ideas will be underprovided.
What is the good aspect of imitation or spill overs of ideas?
The good aspect of imitation or spill overs is that ideas are non rivalrous.
When is a good non-rivalrous?
If one person’s consumption of the good does not limit another persons consumption.
