Lecture 13, 14, 15 (4a The Real Economy in the Long Run) Flashcards
What is real GDP
the market value of the final goods and services
What two things is GDP measured at?
- local market prices or cost or production and converted into US dollar at the exchange rate
- international prices (PPP)
Is GDP often over or under stated in poor countries? Why is this?
They are understated because prices of locally produced goods such as haircuts are lower than international prices in poor countries
GDP is an imperfect measure of what?
welfare
What are the two good reasons to focus on GDP per capita?
- GDP is highly correlated with most things we are interested in eg. _________ expectancy, or the UN “_________ Development _______” based on GDP per capita, life expectancy at ________, adult _________ rate, and school __________ rate
- GDP is a ________ measure, not just an ________ measure, so it makes sense to make comparisons across _________ or through _______
- GDP is highly correlated with most things we are interested in eg. life expectancy, or the UN “Human Development Index” based on GDP per capita, life expectancy at birth, adult literacy rate, and school enrolment rate
- GDP is a cardinal measure, not just an ordinal measure, so it makes sense to make comparisons across countries or through time
Is the relationship between life expectancy and GDP per capita positive or negative? What does this mean?
It is positive
this means that as GDP pre capita increases, life expectancy increases
Increases in real GDP are often used to measure what?
economic growth
Define economic growth
sustained increases in output over time
What does compounding refer to?
the accumulation of a growth rate over a period of time
What is the equation for calculating growth rates with a compound interest formula?
What do these components mean?
GDPe = GDPb(1+r)^n
GDPe = real GDP at the end of the growth period
GDPb = real GDP at the beginning of the growth period
r = annual average rate of growth
n = number of years between the beginning and end years
What is the rule of 70 and what is the equation?
70/x
if a variable grows at x percent each year, then that variable will double in approximately 70/x years
What countries are the technological leaders?
UK
USA
Why is the UK a technological leader?
Growth is initially slow, but has been persistent. In the 1970s, there was the industrial revolution with a series of remarkable inventions and the accumulation of huge amount of capital
Why is the USA a technological leader?
It overtook the Uk in the 19th century. Growth was initially slow, but it has been persistent
What are 8 catch up countries?
- Germany
- Norway
- Japan
- Singapore
- Taiwan
- Korea
- Hong Kong
- China
What does the process of catch up involve?
- high ________ and rapid increases in _______ ratios
- very high investment in _________
- adoption of more modern ________
- increase in importance of _________ production, and increase in _______ force ____________
- increased __________, and manufacturing _____
- high investment and rapid increases in K/L ratios
- very high investment in education
- adoption of more modern technology
- increase in importance of market production, and increase in labour force participation
- increased specialisation, and manufacturing exports
A country’s living standard depends on its ability to produce what?
goods and services
Define productivity
the amount of goods and services that a worker can produce from each hour of work
To understand the large differences in living standards across countries, we must focus of what?
the production of goods and services
As labour productivity increases, what increases?
standard of living
Define factors or production
the inputs to produce goods and services
The factors of production determine the what?
productivity
What are four examples of factors of production?
physical capital
human capital
natural resources
technological knowledge
What does the production function describe?
the relationship between the quantity of inputs used in production and the quantity of output from production
What equation for the production function and what do each of the components mean?
Y = F(L,K,H,N,A) Y = quantity of output L = quantity of labour K = quantity of physical labour H = quantity of human capital N = quantity of natural resources A = available production technology
Production functions with constant returns to scale can be written
xY = F(xL,xK,H,xN,A). Setting x = 1/L, we get
Y/L = F(1, K/L, H, N/L, A).
What do these mean?
Y/L = output per worker (labour productivity)
K/L - physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker
According to the equation, countries with higher capital should have higher _________ productivity. However, diminishing marginal __________ means that increases in capital per worker will _________ but at a __________ rate
labour
capital
increase
decreasing
If a country is capital poor, increases in capital will increase _________ and this can continue for a while. Eventually, however, continuous increases in capital per worker will not generate high rates of ________
output
growth
What is capital deepening?
this is increasing the number of units of existing technology (not necessarily replacing old technology with new technology)
What does human capital refer to?
the talents, training, experience and skills of workers
How does an individual accumulate human capital?
by education, training, experience
What does general technology refer to?
both the maximum technological output possible from using a particular production technique or machine
What is the major driver of productivity?
technology
Why does aid to poor countries sometimes fail?
because good technology without good managed practices and skilled operators is wasted
Technological developments have what two main forms?
- machines that do old thins better
2. machines that do completely new things
What are 6 government policies that raise productivity and living standards?
- encouraging saving and investment
- encourage investment from abroad
- encourage education and training
- promote research and development
- establish secure property rights and maintain political stability
- promote free trade
What is one way to raise future productivity?
to invest more current resources in the production of capital
High growth countries generally have high rates of what?
investment
What is the reason for Asian growth and what does this mean?
Most Asian countries growth was not from physical capital and human capital accumulation, not technological improvement. This means that it is likely to hit diminishing returns, rather than just growing and growing
Growth rates tend to be inversely related to the initial level of income. This means that it is higher for _________ countries and moderate for ______ countries which seems to suggest what?
poor
rich
the process of convergence in income levels around the world
