Mechanisms of Growth

Question 1

Based on the Solow model, what is a mechanism for growth in short and long run

Answer 1

Capital accumulation for SHORT run growth

Technological change for LONG run growth

Question 2

What is the basis of Malthusian theory

Answer 2

When an increase in the population offsets the increase in output

Question 3

What does Malthus think about fertility rates

Answer 3

Any increase in income per capita above the subsistence level will increase fertility rates. The higher fertility rates would fuel higher population growth, which in turn would drive income per capita back down to the subsistence level.

Question 4

What are the three building blocks of the solow model

Answer 4

1. Aggregate production function
2. Physical capital accumulation equation
3. Savings by households

Question 5

What is the aggregate production function

Answer 5

Y = A x F(k,h)

Question 6

What is the physical capital accumulation equation

Answer 6

Kt+1 = (1-d) x Kt + It (t+1 and t here are small)

Question 7

What is the equation for Saving by Households

Answer 7

I = S x Y

Y = A x F(K,H)

Question 8

What is convergence in the Solow model

Answer 8

Convergence = Catch up growth

Countries that are further below the steady state grow faster than those that are closer to the steady state.

Question 9

What is convergence driven by

Answer 9

Capital Accumulation

Question 10

What does Capital Accumulation do to growth with regard to the steady state

Answer 10

Capital Accumulation generates growth in the short run but not in the long run once the economy reaches the steady state (due to diminishing marginal product of captial)

Question 11

What does Technological progress do to growth with regards to the steady state

Answer 11

Technological progress generates growth in the long run as it increases the steady state per capita. A source of sustained growth in GDP.

Question 12

What is a Malthusian response to technological change

Answer 12

As technology increases, output and consumption also increase, then a higher living standard quickly leads to a rise in population leaving output per capita constant (stagnation)

Question 13

What are the three fundamental causes of prosperity

Answer 13

1. Geography Hypothesis
2. Cultural Hypothesis
3. Institutions Hypothesis

Question 14

What is the Geography Hypothesis

Answer 14

differences in geography, climate, and ecology are ultimately responsible for the large differences in prosperity

Question 15

What is the Culture Hypothesis

Answer 15

different values and cultural beliefs are ultimately responsible for the large differences in prosperity observed around the globe.

Question 16

What is the Institution’s Hypothesis

Answer 16

differences in the way societies organise themselves and shape the incentives of individuals and businesses are ultimately responsible for the large differences in prosperity observed around the globe.

Question 17

Qualities of an inclusive economic institution

Answer 17

Institutions that support and encourage economic transactions
Protect private property
Uphold law and order

Question 18

Qualities of an extractive economic institution

Answer 18

Institutions that remove resources from the economy
Do not protect private property
Do not enforce private contracts