Module 3

Question 1

Calculate the growth rate of GDP per capita accounting for inflation and population growth

Answer 1

= nominal GDP growth rate - inflation rate - population growth rate

Question 2

How to calculate compound growth of GDP in a country from one year to another

Answer 2

GDP year A = GDP year B × (1 + growth rate)(A−B)

GDP per capita 2018 = $32,000 × (1 + 0.02)^35 = $63,996

Question 3

Rule of 70

Answer 3

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)

Question 4

What is Economic Growth

Answer 4

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

Question 5

Output Potential

Question 6

Potential GDP

Answer 6

The maximum amount of output an economy can produce, with a given set of inputs

Question 7

Components of Productivity - Physical Capital

Answer 7

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

Question 8

Determinant of Productivity: Level of Savings in an Economy

Answer 8

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

Question 9

Components of Productivity - Human Capital

Answer 9

The set of skills, knowledge, experience and talent that determines productivity

Question 10

Components of Productivity - Human Capital

Answer 10

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

Question 11

Components of Productivity - Natural Resources

Answer 11

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

Question 12

Components of Productivity - Technology

Answer 12

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

Question 13

Relationship between rates of change and level of income

Answer 13

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

Question 14

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?

Answer 14

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

Question 15

What is the growth accounting equation?

Answer 15

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

Question 16

Convergence

Answer 16

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

Question 17

What is the investment trade off

Answer 17

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

Question 18

Where does savings for investment capital come from?

Answer 18

Can come from within a country or outside a country

Within: domestic income - consumption spending
Outside: foreign direct investment

Question 19

Foreign direct investment (FDI)

Answer 19

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.

Question 20

Growth Policy: Education

Answer 20

Having good foundational education can vastly improve the productivity of a country because the workers are capable of much more advanced tasks

Question 21

Growth Policy: Health

Answer 21

Being in good health makes it much easier to be productive, and decreases the amount of days that employees miss work

Question 22

Growth Policy: Technological development

Answer 22

Having continuous inflows into R&D, the country’s economy will develop many more innovations which increases productivity

Question 23

Growth Policy: Good government, property rights, and land ownership

Answer 23

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

Question 24

Growth Policy challenges: What is the poverty trap? Can countries invest in one area at a time such as technology or physical capital?

Answer 24

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