Growth Introduction

Question 1

What is purchasing power parity

Answer 1

Exchange rate based on the cost of goods eg food, transport, fuel
How much can €1 worth of goods buy you….

Question 2

Why is Big Mac used to show PPP

Answer 2

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

Question 3

Why is GDP per capita better at showing living standards

What are limitations of GDP per capita

Answer 3

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

Question 4

How do we measure annual GDP growth

Answer 4

(New gdp - old gdp)/old gdp

Question 5

What is the Malthusian theory

Answer 5

Without invreases in food production., larger populations are self correcting ie war/famine

Question 6

When did we escape the Malthusian trap

Answer 6

Industrial revolution

Question 7

Why did industrial revolution happen in England

Answer 7

They wanted to use machinery instead of paying for labour
Eg steam engine

In other countries, it was cheaper to hire workers than innovate

Question 8

What is the production function (equation)

Answer 8

Y = AK^(1-a)L^a

Question 9

What does L stand for in the production function

Answer 9

Labour

Question 10

What does K stand for in the production function

Answer 10

Capital

Question 11

What does A stand for in the production function

Answer 11

Technology

Question 12

What is diminishing marginal product

Answer 12

When you hold one input of the production function fixed

Question 13

What is the dismissing marginal product of labour

Answer 13

Hold capital fixed

As labour increases, growth of output decreases

Question 14

What is constant returns to scale in the production function

Answer 14

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

Question 15

What are endogenous variables

Answer 15

Variables we have control over eg labour, capital

Question 16

What are exogenous variables

Answer 16

Variables we have no control over eg technology

Question 17

Increasing A (technology) in the producing function will lead to more or less output

Answer 17

More

Question 18

What does small y represent in the solow growth model

Answer 18

Output per person (assuming the labour force is the population)

Question 19

What does small k represent in solow growth model

Answer 19

Capital per person

Question 20

What do small letters usually mean

Answer 20

Per capita

Question 21

In the solow model, what two terms can be used interchangeably

Answer 21

Savings and investment

Question 22

According to the solow growth model what does investment become over time

Answer 22

Capital

Question 23

How is capital stock depreciation calculated

Answer 23

Depreciation rate * capital

Question 24

If capital depreciation is greater than investment, what will tomorrow’s capital look like

Answer 24

Will decrease

Question 25

If investment is greater than capital depreciation, what will tomorrow’s capital look like

Answer 25

Will increase

Question 26

If investment is equal to capital depreciation, what will tomorrow’s capital look like

Answer 26

Will be equal to today’s capital

Question 27

Where is the equilibrium in the solow growth model

Answer 27

Where depreciation of capital is equal to investment

Question 28

How can countries grow using the solow growth model

Answer 28

Saving more?

Question 29

When countries have different savings rates, can they have the same steady state

Answer 29

No | The living standards at these steady stateswill be quite different too

Question 30

Does population growth mean GDP growth

Answer 30

No, more pioulation means lower GDP per capita

Question 31

Growth in living standards are more likely to occur from ... than increase in GDP per capita

Answer 31

Innovation (research and development) Improving human skills (investing in education) Ie technological (A) Improvements

Question 32

Additional influences on economic growth for a country

Answer 32

Their geography (what natural resources are available to them, if they’re landlocked, a small island) Globalisation/trade networks Institutions/governments

Question 33

Typical growth rates in A. Developed countries B. Developing countries

Answer 33

A. 1-2% | B. 5-12%

Question 34

What is the rule of 70

Answer 34

If some variable grows at x% per year, then it’ll double in 70/x years approx

Question 35

Why is investment in human capital a key to growth

Answer 35

It’s likely to increase technology which in turn promotes efficiency and increases productivity

Question 36

What is productivity

Answer 36

Quantity of goods/services that a worker can produce in a specific time period

Question 37

What is human capital

Answer 37

Knowledge and skills

Question 38

What is the equilibrium in solow growth model called

Answer 38

Steady state

Question 39

Why do we use the production function

Answer 39

To understand how output will grow according to input

Question 40

Lower investment typically means there will be lower or higher quality of life

Answer 40

Lower

Question 41

Can gdp increase solve all Millenium development goals? What can it solve? What else is needed to solve?

Answer 41

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

Question 42

if two countries have different savings rates, who will reach steady state first typically what does this mean

Answer 42

one with lower savings rate this means the country with the lower savings rate has a lower quality of life(lower GDP)

Question 43

what is nominal exchange rate

Answer 43

rate at which a person can trade the currency of one country for the currency of another

Question 44

what are real exchange rates

Answer 44

rate at which a person can trade the goods and services of one country for the goods and services of another

Question 45

how can different levels of output but same level of capital in the solow growth model be explained

Answer 45

one country has more productive technologies

Question 46

what is the only thing that can drive long term growth

Answer 46

technological changes

Question 47

what is potential output

Answer 47

GDP as high as it can be (all resources being used) without competition for resources causing inflation