Growth Introduction Flashcards
What is purchasing power parity
Exchange rate based on the cost of goods eg food, transport, fuel
How much can €1 worth of goods buy you….
Why is Big Mac used to show PPP
Because the product is universal but it’s price can show the difference between currencies in countries
Eg Swiss Big Mac is more expensive in dollars than US Big Mac meaning Swiss currency is currently overvalued
Why is GDP per capita better at showing living standards
What are limitations of GDP per capita
It shows average income
It doesn’t show spread of wealth
Population size can have an effect eg Ireland has a very high GDP per capita because of its small population
How do we measure annual GDP growth
(New gdp - old gdp)/old gdp
What is the Malthusian theory
Without invreases in food production., larger populations are self correcting ie war/famine
When did we escape the Malthusian trap
Industrial revolution
Why did industrial revolution happen in England
They wanted to use machinery instead of paying for labour
Eg steam engine
In other countries, it was cheaper to hire workers than innovate
What is the production function (equation)
Y = AK^(1-a)L^a
What does L stand for in the production function
Labour
What does K stand for in the production function
Capital
What does A stand for in the production function
Technology
What is diminishing marginal product
When you hold one input of the production function fixed
What is the dismissing marginal product of labour
Hold capital fixed
As labour increases, growth of output decreases
What is constant returns to scale in the production function
If we increase labour and capital by the same amount, output will also increase by that proportion eg double labour and capital means output will be doubled
What are endogenous variables
Variables we have control over eg labour, capital
What are exogenous variables
Variables we have no control over eg technology
Increasing A (technology) in the producing function will lead to more or less output
More
What does small y represent in the solow growth model
Output per person (assuming the labour force is the population)
What does small k represent in solow growth model
Capital per person
What do small letters usually mean
Per capita
In the solow model, what two terms can be used interchangeably
Savings and investment
According to the solow growth model what does investment become over time
Capital
How is capital stock depreciation calculated
Depreciation rate * capital
If capital depreciation is greater than investment, what will tomorrow’s capital look like
Will decrease
If investment is greater than capital depreciation, what will tomorrow’s capital look like
Will increase
If investment is equal to capital depreciation, what will tomorrow’s capital look like
Will be equal to today’s capital
Where is the equilibrium in the solow growth model
Where depreciation of capital is equal to investment
How can countries grow using the solow growth model
Saving more?
When countries have different savings rates, can they have the same steady state
No
The living standards at these steady stateswill be quite different too
Does population growth mean GDP growth
No, more pioulation means lower GDP per capita
Growth in living standards are more likely to occur from … than increase in GDP per capita
Innovation (research and development)
Improving human skills (investing in education)
Ie technological (A) Improvements
Additional influences on economic growth for a country
Their geography (what natural resources are available to them, if they’re landlocked, a small island)
Globalisation/trade networks
Institutions/governments
Typical growth rates in
A. Developed countries
B. Developing countries
A. 1-2%
B. 5-12%
What is the rule of 70
If some variable grows at x% per year, then it’ll double in 70/x years approx
Why is investment in human capital a key to growth
It’s likely to increase technology which in turn promotes efficiency and increases productivity
What is productivity
Quantity of goods/services that a worker can produce in a specific time period
What is human capital
Knowledge and skills
What is the equilibrium in solow growth model called
Steady state
Why do we use the production function
To understand how output will grow according to input
Lower investment typically means there will be lower or higher quality of life
Lower
Can gdp increase solve all Millenium development goals? What can it solve? What else is needed to solve?
It can lead to solving problems as the government will have the funding to do so but a lot more is needed than the funds
You need a government to target their investment
You need gender equality, entrepreneurship, low levels of crime etc
if two countries have different savings rates, who will reach steady state first typically
what does this mean
one with lower savings rate
this means the country with the lower savings rate has a lower quality of life(lower GDP)
what is nominal exchange rate
rate at which a person can trade the currency of one country for the currency of another
what are real exchange rates
rate at which a person can trade the goods and services of one country for the goods and services of another
how can different levels of output but same level of capital in the solow growth model be explained
one country has more productive technologies
what is the only thing that can drive long term growth
technological changes
what is potential output
GDP as high as it can be (all resources being used) without competition for resources causing inflation
