Lecture 13

Question 1

Define human capital

Answer 1

skills and knowledge

Question 2

Do poor countries tend to catch up with rich countries?

Answer 2

no but they converge into clubs of countries

Question 3

Sometimes (eg. in South Korea), there is import substitution. Define this

Answer 3

This is when industries are built up to replace imports and then some become export industries so there is a huge increase in GDP per person.

Question 4

What happens if there is no economic growth?

Answer 4

you can’t generate taxes and there will be lower standard of living

Question 5

What is a downside to economic growth?

Answer 5

the environmental impacts and the income inequality

Question 6

From 1820 to 2012, describe the trend in the percentage of global GDP by China

Answer 6

it fell from 1820 until 1970 and then it began to increase due to introduced market reforms, market zones.
People who worked hard and got higher income were therefore encouraged to be innovative and there was access to export markets

Question 7

Why was the European global GDP share so high?

Answer 7

due to the industrial revolution

Question 8

What are the two different ways to measure GDP? Which country is largest based on each method?

Answer 8

1. local market prices or cost of production and converted into US dollars at exchange rate (USA is the biggest using this method)
2. International prices (PPP method ie. taking into account that prices are different in different places, China biggest using this method)

Question 9

GDP is a __________ measure. What does this mean?

Answer 9

cardinal

this means that we can track the number in time and compare countries and in time

Question 10

There is a _________ relationship between GDP per capita and life expectancy

Answer 10

positive

Question 11

Increases in real GDP are often used to measure what?

Answer 11

economic growth

Question 12

Define economic growth

Answer 12

sustained increase in output over time

Question 13

Annual growth rates that may seem small become large when _________ compounded for many years

Answer 13

compounded

Question 14

What does compounding refer to?

Answer 14

the accumulation of a growth rate over a period of time

Question 15

What is the standard compound interest formula and what do each of the components mean?

Answer 15

GDPe = GDPb(1 + r)^n

• GDPe is the real GDP at the end of the growth period
• GDPb is the real GDP at the beginning of the growth period
• r is the annual average rate of growth
• n is the number of years between the beginning and the end years

Question 16

What is the rule of thumb about doubling a variable?

Answer 16

if a variable grows at x percent per year, then that variable will double in approximately 70/x years

Question 17

What is NZ’s average growth in real GDP per person?

Answer 17

1.6% per year

Question 18

What did the leaders such as UK and USA do well?

Answer 18

they had high rates of growth

growth was initially slow but it has been persistent

Question 19

What did the catch up countries do, especially Japan and Korea?

Answer 19

They saved and gave up consumption now so they could invest in capital to create infrastructure rather than consuming it now. This means they could have larger expansions in the future

Question 20

Why is a Japanese worker more productive than a worker from Kenya?

Answer 20

There is more investment and more capital per worker and having a better education (human capital)

Question 21

What caused the increase in South Korea?

Answer 21

an increase in capital, not better capital

Question 22

What caused the increase in Singapore?

Answer 22

There was huge increase in labour force participation

Question 23

What 5 things does the catch up process involve?

1. very high __________ and rapid increases in _________ ratios
2. very high _________ in __________
3. adoption of more modern ___________
4. increase in importance of _________ __________, and increase in ________ force ___________
5. increased ____________, and ____________ exports

Answer 23

1. very high investment and rapid increases in K/L ratios
2. very high investment in education
3. adoption of more modern technology
4. increase in importance of market production, and increase in labour force participation
5. increased specialisation, and manufacturing exports

Question 24

A country’s standard of living depends on what?

Answer 24

its ability to produce goods and services (productivity)

Question 25

Define productivity

Answer 25

the amount of goods and services that a worker can produce from each hour of work

Question 26

What can someone do to increase their productivity?

Answer 26

gain more skills, education, more human capital per person

Question 27

What directly determines the productivity?

Answer 27

the factors of production

Question 28

Define factors of production

Answer 28

the inputs used to produce goods and services

Question 29

What are four factors of production? Give examples

Answer 29

1. physical capital such as machines, buildings, factories, tools etc.
2. human capital such as skills, knowledge, talents
3. natural resources such as land, rivers, mineral deposits (may need technology to access these natural resources)
4. technological knowledge ie. the practical application of the knowledge

Question 30

What do economists use to describe the relationship between the quantity of inputs used in production and the quantity of output from production?

Answer 30

the production function

Question 31

What is the production function and what do the components mean?

Answer 31

Y = F(L, K, H, N, A) where
Y = quantity of output
A = available production technology
L = quantity of labour
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F = function

Question 32

Production functions can have constant returns to scale. What does this mean?

Answer 32

that doubling all inputs causes a doubling of the amount of output

Question 33

How would we re-write the production function as a per worker basis? What do each of the components mean?

Answer 33

Y/L = F (1, K/L, N/L, H, A)
where
Y/L = output per worker
K/L = physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker

Question 34

In the reading, what can some of the growth be attributed to?

Answer 34

It was due to capital accumulation, getting more people into work, spending more on human capital rather than technological development, at that stage but this runs into DMR