Lecture 2 - The era of stagnation

Question 1

What was the era of stagnation?

Answer 1

The era of stagnation was the time period from 130000 BCE - 18th CE in which there was no sustained economic growth

Question 2

What was the lack of growth up until the 18th century confirmed by?

Answer 2

The lack of growth until the 18th century was confirmed by the fact that
real wages did not change much over the last millennia

Question 3

What is a model and how are they used by economists?

Answer 3

• A model is a simplified, easy to study representation of the real world
• Economists develop theories by building and studying models

Question 4

What must good models do?

Answer 4

Good models must:
- Make reasonable assumptions about the real world
- By studying them, we must be able to learn something interesting about the real world

Question 5

Can models be verbal or mathematical?

Answer 5

Models can be verbal or mathematical

Question 6

Give the simplest verbal model of a traditional economy

Answer 6

“GDP is produced using labour and land”

Question 7

State the general mathematical model used to represent a traditional economy

Answer 7

Y = AX^βL^1-β

Question 8

What does the symbol Y represent in a mathematical model?

Answer 8

Y represents GDP

Question 9

What does the symbol X represent in a mathematical model?

Answer 9

X represents land

Question 10

What does the symbol L represent in a mathematical model?

Answer 10

L represents labour

Question 11

What does the symbol A represent in a mathematical model?

Answer 11

A is a measure of how efficiently land and labour (X and L) are combined

Question 12

What does the symbol β represent in a mathematical model?

Answer 12

β is just a number between 0 and 1

Question 13

What does the general mathematical model of a traditional economy tell us?

Answer 13

• Y = AX^βL^1-β
• This model tells us that GDP is produced using labour and land

Question 14

What does the derivative of the mathematical model used to represent a traditional economy with respect to A tell us?

Answer 14

• dY/dA = X^βL^1-β > 0
• This tells us that for given amounts of labour and
  land, the more efficient the way in which they are
  combined, the higher is GDP

Question 15

What does the derivative of the mathematical model used to represent a traditional economy with respect to X tell us?

Answer 15

• dY/dX = βAX^β-1L^1-β > 0
• This model tells us that for a given amount of land, the more labour there is, the higher GDP is (and similarly for more land given labour)”.

Question 16

What does the second derivative of the mathematical model used to represent a traditional economy with respect to X tell us?

Answer 16

• d2Y/dX^2 = (β-1)βAX^B-2L^1-B < 0
• This model tells us that the additional contribution of extra labor for given land is lower, the more labor there is
  already

Question 17

What does the symbol y represent?

Answer 17

y represents GDP per capita

Question 18

Derive a function for GDP per capita (y)

Answer 18

y = Y/L = AX^βL^1-β/L = AX^βL^-β

Question 19

What effect does an increase in population have on GDP per capita?

Answer 19

An increase in population leads to a decrease in GDP per capita