Long Run Economic Growth Flashcards
Productivity
1) Quantity of goods and services produced from each unit of labor
What are the parts of productivity
1) physical capital
2) human capital
3) natural resources
4) tech knowledge
5) Labor
Physical Capital per Worker
1) Physical = stock of equipment used to produce goods/services (
2) produced from factors of production
Human Capital per worker
1) knowledge + skills workers acquire through education, training, experience
2) less tangible than physical capital
3) requires inputs in form of teachers, books, student time
Natural resources per worker
1) land, rivers, mineral deposits, other resources
2) renewable + nonrenewable resources
3) very important BUT not required for an economy to be successful i.e. Japan is very rich BUT lacks natural resources
Technological Knowledge
1) can be common knowledge or proprietary (only known by a certain company)
Most economists are _________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation have tended to _______ over time
1) not concerned
2) fall
Trade off with saving capital
1) means you have to reduce current consumption so that you can save for tomorrow
Diminishing Returns
1) As stock of capital rises –> extra output produced from additional unit of capital falls
2) Increase in saving rate –> leads to higher level of productivity/income BUT not to higher growth in long run
Catch-up Effect
1) easier for country to grow quickly if it starts out relatively poor
2) SO for countries with low productivity, adding capital results in an increase in productivity BUT for countries with high productivity, adding additional capital only marginally increases productivity
Foreign direct investment
1) capital investment that is owned and operated by a foreign entity
2) Ford building and operating a car factory in Mexico
Should poor countries allow foreign investment
1) Allows poorer countries to grow because the investment increases economy’s stock of capital –> higher productivity + higher wages
Impact of education
1) Very important in improving human capital
2) imparts a positive externality
3) problem –> brain drain –> many highly educated workers leave poorer countries for richer ones
Impact of health + nutritition
1) poorer countries tend to have more malnourished individuals –> lowers productivity
Property Rights + Political Stability
1) Foster economic growth by protecting property rights + promoting political stability
2) property rights must be enforced + justice system established –> discourage theft + fraud
3) if politically unstable –> less confidence that property rights will be respected –> people won’t establish businesses or invest
Free Trade
1) important for long run economic growth
2) many poor countries pursue inward-oriented policies (infant-industry) BUT this is worse since forces them to produce everything they need VERSUS outward-oriented where they can obtain goods they need without having to make that technology
Research and development
1) improved economic conditions significantly
2) knowledge –> public good so once discovered everyone enjoys it + govt plays a role in disseminating much of this info (NIH)
3) patents –> encourage productivity + innovation + allow companies to reap benefits of their discovery for a limited amount of time
Effect of population growth on economy
1) increased pop growth –> large labor force AND more people to consume goods/service
2) very high population growth –> strains capital especially HUMAN CAPITAL –> reduced quality of education for example
3) increased growth –> increase # of scientists/inventors/engineers who can help advance tech
Types of unemployment
1) natural rate of unemployment = term for amount of unemployment economy usually has
2) Cyclical = year-to-year fluctuations around natural rate
How is the adult population divided
1) Employed = includes those full + part time
2) unemployed = those not employed or could not find work in past 4 weeks
3) not in labor force = homemakers, retirees, full-time students
What is the labor force
1) labor force = # employed + # unemployed
unemployment rate
(# unemployed/labor force) * 100
Labor force participation rate
1) measure % of total adult population that is in the labor force
2) (labor force/adult pop) * 100
Why is it difficult to measure unemployment rate
1) people move in + out of labor force often
2) certain ppl say they’re unemployed to get govt benefits but they are earning under table
3) some individuals have given up looking for job –> discouraged workers –> don’t show up in unemployment calculations
4) challenging to tell diff btwn
