Lecture 13, 14, 15 (4a The Real Economy in the Long Run)

Question 1

What is real GDP

Answer 1

the market value of the final goods and services

Question 2

What two things is GDP measured at?

Answer 2

• local market prices or cost or production and converted into US dollar at the exchange rate
• international prices (PPP)

Question 3

Is GDP often over or under stated in poor countries? Why is this?

Answer 3

They are understated because prices of locally produced goods such as haircuts are lower than international prices in poor countries

Question 4

GDP is an imperfect measure of what?

Answer 4

welfare

Question 5

What are the two good reasons to focus on GDP per capita?

1. 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
2. GDP is a ________ measure, not just an ________ measure, so it makes sense to make comparisons across _________ or through _______

Answer 5

1. 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
2. GDP is a cardinal measure, not just an ordinal measure, so it makes sense to make comparisons across countries or through time

Question 6

Is the relationship between life expectancy and GDP per capita positive or negative? What does this mean?

Answer 6

It is positive

this means that as GDP pre capita increases, life expectancy increases

Question 7

Increases in real GDP are often used to measure what?

Answer 7

economic growth

Question 8

Define economic growth

Answer 8

sustained increases in output over time

Question 9

What does compounding refer to?

Answer 9

the accumulation of a growth rate over a period of time

Question 10

What is the equation for calculating growth rates with a compound interest formula?
What do these components mean?

Answer 10

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

Question 11

What is the rule of 70 and what is the equation?

Answer 11

70/x

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

Question 12

What countries are the technological leaders?

Answer 12

UK

USA

Question 13

Why is the UK a technological leader?

Answer 13

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

Question 14

Why is the USA a technological leader?

Answer 14

It overtook the Uk in the 19th century. Growth was initially slow, but it has been persistent

Question 15

What are 8 catch up countries?

Answer 15

1. Germany
2. Norway
3. Japan
4. Singapore
5. Taiwan
6. Korea
7. Hong Kong
8. China

Question 16

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 _____

Answer 16

• 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

Question 17

A country’s living standard depends on its ability to produce what?

Answer 17

goods and services

Question 18

Define productivity

Answer 18

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

Question 19

To understand the large differences in living standards across countries, we must focus of what?

Answer 19

the production of goods and services

Question 20

As labour productivity increases, what increases?

Answer 20

standard of living

Question 21

Define factors or production

Answer 21

the inputs to produce goods and services

Question 22

The factors of production determine the what?

Answer 22

productivity

Question 23

What are four examples of factors of production?

Answer 23

physical capital
human capital
natural resources
technological knowledge

Question 24

What does the production function describe?

Answer 24

the relationship between the quantity of inputs used in production and the quantity of output from production

Question 25

What equation for the production function and what do each of the components mean?

Answer 25

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

Question 26

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?

Answer 26

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

Question 27

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

Answer 27

labour
capital
increase
decreasing

Question 28

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 ________

Answer 28

output

growth

Question 29

What is capital deepening?

Answer 29

this is increasing the number of units of existing technology (not necessarily replacing old technology with new technology)

Question 30

What does human capital refer to?

Answer 30

the talents, training, experience and skills of workers

Question 31

How does an individual accumulate human capital?

Answer 31

by education, training, experience

Question 32

What does general technology refer to?

Answer 32

both the maximum technological output possible from using a particular production technique or machine

Question 33

What is the major driver of productivity?

Answer 33

technology

Question 34

Why does aid to poor countries sometimes fail?

Answer 34

because good technology without good managed practices and skilled operators is wasted

Question 35

Technological developments have what two main forms?

Answer 35

1. machines that do old thins better

2. machines that do completely new things

Question 36

What are 6 government policies that raise productivity and living standards?

Answer 36

1. encouraging saving and investment
2. encourage investment from abroad
3. encourage education and training
4. promote research and development
5. establish secure property rights and maintain political stability
6. promote free trade

Question 37

What is one way to raise future productivity?

Answer 37

to invest more current resources in the production of capital

Question 38

High growth countries generally have high rates of what?

Answer 38

investment

Question 39

What is the reason for Asian growth and what does this mean?

Answer 39

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

Question 40

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?

Answer 40

poor
rich
the process of convergence in income levels around the world