Growth Part 1

Question 1

Why do we care about growth?

Answer 1

We need a deeper understanding of the standard of living in different areas

Question 2

What variable is used to make comparisons over time?

Answer 2

Real output per capita

Question 2

What is the variable used to measure growth?

Answer 2

Output per capita

Question 2

Why shouldn’t we use common currency as a comparison measure of GDP across different countries?

Answer 2

• Exchange rates vary more than relative standards of living
• Market exchange rate doesn’t reflect relative prices of non-traded products - e.g. housing and food

Question 2

How should we compare GDP across countries instead?

Answer 2

Use a common set of prices for all countries

Question 3

What do adjusted real GDP numbers aim to take into account?

Answer 3

How purchasing power differs across countries

Question 4

What’s the common name for adjusted real GDP numbers?

Answer 4

Purchasing Power Parity Numbers

Question 5

Where are PPP numbers taken from?

Answer 5

Penn World Tables

Question 6

What are the Penn World Tables?

Answer 6

PPP series for GDP and expenditure components for most countries in the world

Question 7

What effect does the market exchange rate have on the difference in standard of living between high and low GDP nations?

Answer 7

Market exchange rate exaggerates difference - difference is narrower when taking local prices into account

Question 8

What relation does GDP per capita have with life satisfaction?

Answer 8

As GDP per capita increases, the average life satisfaction of individuals generally increases.

Question 9

How do you calculate growth rate?

Answer 9

100 x (GDPt - GDPt-1)/GDPt-1

Question 9

How do you calculate average annual growth rate in a country over a period of time?

Answer 9

g = (GDPt / GDP1styr)^1/n - 1

Question 10

What is economic growth?

Answer 10

An increase over time in the quantity of goods and services produced by a country

Question 11

How do each of these measures differ when measuring rate of growth?
A) Real GDP
B) Real GDP per Capita
C) Use of PPP numbers

Answer 11

A) adjusts for inflation
B) adjusts for inflation and size of population
C) takes relative prices into account

Question 12

Where is there clear evidence of convergence?

Answer 12

• All countries with high levels of output per person
• Most asian countries - four tigers have started catching up with Japanese output

Question 12

What does convergence mean in terms of GDP per capita?

Answer 12

• Levels of income per capita should coincide in the long run
• Lower income countries should grow faster than higher income countries

Question 13

Where is there no evidence of convergence?

Answer 13

Africa

Question 14

What are the two equations the Solow model is built around?

Answer 14

• A production function
• A capital accumulation equation

Question 15

What is the aggregate production function?

Answer 15

• The relation between aggregate output and input
• Y = F (K,N)
• Y = Aggregate Output
• K = Capital - sum of all the machines
• N = Labour - sum of all the workers in the economy

Question 16

What does the function tell us?

Answer 16

• How much output is produced for given quantities of capital and labour
• Dependent on the state of technology

Question 17

What are constant returns to scale?

Answer 17

• If quantities of capital and labour are doubled, output will also double
• 2Y = F (2K, 2L)
• xY = F (xK, xL)

Question 18

Returns to Factors

Answer 18

What do we expect to happen if only one of the two inputs is increased, holding the other constant?

Question 19

What does decreasing returns to capital mean?

Answer 19

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

Question 20

What does decreasing returns to labour refer to?

Answer 20

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

Question 21

What is the intensive form of the aggregate production function?

Answer 21

Y/N = F (K/N, N/N) = F (K/N, 1)

Question 22

Whats the relation between the capital per worker and the output per worker?

Answer 22

As capital per worker increases, output per worker increases.