Module 3 Flashcards
Calculate the growth rate of GDP per capita accounting for inflation and population growth
= nominal GDP growth rate - inflation rate - population growth rate
How to calculate compound growth of GDP in a country from one year to another
GDP year A = GDP year B × (1 + growth rate)(A−B)
GDP per capita 2018 = $32,000 × (1 + 0.02)^35 = $63,996
Rule of 70
Rule of 70
A simple shortcut for approximating this calculation is the rule of 70. The rule states that the number of years it will take for income to double at the current real growth rate is approximately equal to 70 divided by the growth rate:
Years until income doubles = 70/ (real growth rate)
What is Economic Growth
The standard of living of a country is determined by the average productivity per person. Increases in average productivity per person leads to increased income per capita, which is what we call economic growth
Output Potential
Potential GDP
The maximum amount of output an economy can produce, with a given set of inputs
Components of Productivity - Physical Capital
The stock of equipment and structures that allows for production of goods and services
Examples: a manufacturing company’s factories and machines, a telecommunications provider’s cell towers and cables
Determinant of Productivity: Level of Savings in an Economy
When people deposit their savings into the bank, the bank proceeds to loan that money to businesses, which can then be used to invest in new equipment and tools
Components of Productivity - Human Capital
The set of skills, knowledge, experience and talent that determines productivity
Components of Productivity - Human Capital
Having new machinery and equipment is helpful, but only if the workers know how to use them
Education is the main method of building human capital because it helps firms produce more with the same amount of physical capital. In other words, people can work smarter, not harder
Components of Productivity - Natural Resources
Production inputs that come from the Earth–lakes, mineral deposits (coal, goal, oil) and forests.
Natural renewable resources and non-renewable resources
The access to natural resources can account for some differences in economic development around the world, though not always
Components of Productivity - Technology
It comes in all forms and sizes, some big breakthroughs are the internet and cell phones, and some small advancements are more efficient water pumps for crop irrigation and vehicle engines that drive further on less fuel.
More outputs with the same inputs
Technology is the most transmissible component because one country can generate an idea, and another can use it too
Relationship between rates of change and level of income
At high levels of income, there will be low rates of growth (Canada, Switzerland, US)
At low levels of income, there will be high rates of growth
Can factors of production that got a country to its current level be the same factors of production that drive the country’s future growth?
Not always,
From the 1970s to 1990s, the US expanded rapidly due to the influx of female workers, but the growth could only last so long since supply of female workers dried up. This is a ONE-TIME OCCURENCE that increases income levels, but cannot sustain high rates of change
Technology is said to be a one-time occurence that can continue into the future. According to Moore’s Law, computing capacity has doubled every two-years, showing that innovations can build off of each other. This can sustain a high-rate of change for a long period of time
What is the growth accounting equation?
Captures the growth of outputs compared to the growth of inputs
Helps breakdown the contributions of technology, labor and capitals to output per person (but specifically technology)
gY = gA + agK + (1-a)gL
gY = growth rate of outputs gA = growth rate of technology gK = growth rate of capital gL = growth rate of labour a = share of GDP that is distributed to owners of capital
Convergence
The idea that countries grow up quickly and slow down to an extent after reaching a certain level. Thus, countries tend to “converge” at a similar growth rate
What is the investment trade off
Investment Trade Off: a reduction in current consumption to pay for the investment in capital intended to increase future production
One might think, “If physical capital increases productivity, then why not put all money into physical capital?”. However, money that is invested in physical capital cannot be spent on consumption. This is the opportunity cost that comes with investments
Where does savings for investment capital come from?
Can come from within a country or outside a country
Within: domestic income - consumption spending
Outside: foreign direct investment
Foreign direct investment (FDI)
Investments made by a foreign country in another country, which can be human capital or simply capital
Not always does human capital benefit the country to the expected extent because a foreign manager may not train local talen, for example.
Growth Policy: Education
Having good foundational education can vastly improve the productivity of a country because the workers are capable of much more advanced tasks
Growth Policy: Health
Being in good health makes it much easier to be productive, and decreases the amount of days that employees miss work
Growth Policy: Technological development
Having continuous inflows into R&D, the country’s economy will develop many more innovations which increases productivity
Growth Policy: Good government, property rights, and land ownership
Having a trustworthy, secure and safe country to live in is of utmost importance for productivity. People would not invest in vehicles, factories or other physical capital if they were susceptible to being stolen (with no repercussions)
Governance over how open trade is can also determine the economic growth of a country
Growth Policy challenges: What is the poverty trap? Can countries invest in one area at a time such as technology or physical capital?
The POVERTY TRAP is when a country can’t afford the things that will help them out of poverty. Thus, they require funding
The largest difficulty with investing in low-income countries is that they cannot invest their capital into one area at a time, and need to invest simultaneously into many areas in order to reap the benefits of their investment. If a company only invests in technology, then they may not be able to take advantage of it because their population can’t read. Thus, a country needs all areas to receive capital investments to experience economic growth
