Modern Economy

Question 1

Why did the UK experience sustained economic growth first?

Answer 1

• UK experienced the industrial revolution first due to a series of important inventions
• productivity increased in britain first

Question 2

Why was the UK the first to invent technologies?

Answer 2

1. British constitution- Atlantic trade strengthened merchant groups who obtained protection of property rights
2. Culture- money acquired in industry was less tainted by stigma of being nuveau rich
3. Relative prices- higher wages incentivised labour saving technologies

Question 3

Solow model assumptions of modern economy

Answer 3

• GDP produced using labour and capital
• for given capital, if labour increases, GDP increases
• diminishing returns on labour

Question 4

Fundamental law of motion of capital

Answer 4

Shows how capital accumulation occurs and how it is dependent on the economy’s saving rate and depreciation rate

Question 5

When can capital no longer be accumulated?

Answer 5

When investment equals depreciation

Question 6

How does an increased saving rate affect capital accumulation

Answer 6

This increases the level of capital per person and therefore GDP per capita. Long run growth is still zero tho

Question 7

How does population growth affect capital accumulation?

Answer 7

This decreases the level of capital per person and therefore GDP per capita

Question 8

What does the solow model predict about countries wealth?

Answer 8

Countries with higher saving rates and lower population growth are richer

Question 9

What is AL?

Answer 9

Efficiency units of labour

Question 10

What does the stock of capital per efficiency unit depend on?

Answer 10

g^a

Question 11

What does the solow model say are the two engines of growth?

Answer 11

Technological progress and capital accumulation

Question 12

What is the steady state of growth ?

Answer 12

g=g^a

Question 13

Policies for increasing growth

Answer 13

1. Give subsidy to investment or tax cuts to savings
2. Demographic control (one child policy in China)
   Both policies increase growth temporarily g>g^a but in the long run they only have level effects

Question 14

In which economies does capital play a small part?

Answer 14

In service economies (banking and sport)

Question 15

How is human capital accumulated?

Answer 15

By spending time learning

Question 16

According the modified solow model with human capital why are certain countries rich?

Answer 16

Because they have
•a high investment rate in physical capital/ human capital
•high level of technology
•low population growth

Question 17

Failures of solow model

Answer 17

Ignored technological level it only accounts for technological growth

Question 18

What is it better to interpret A as?

Answer 18

It is better to interpret A as total factor production since it is a residual absorbing all differences between countries not captured by K and H

Question 19

Why do ideas only need to be produced once?

Answer 19

Because they are non rivalrous so everyone can use them

Question 20

Describe the structure of costs for ideas

Answer 20

Ideas have very high fixed costs but very low marginal costs, this implies increasing returns to scale

Question 21

Why does the growth of ideas rely on imperfect competition

Answer 21

Firms will only produce ideas if it will be profitable. They charge a price for consuming the good which is above the marginal cost in order to make up for the high fixed costs. This doesn’t occur in perfect competition