States: Inflation, Unemployment, GDP Flashcards
Extractive institutions?
- elite who design economic institutions in order to enrich themselves and perpetuate their power (powering those who benefit from the extraction) at the expense of the vast majority of people in society.
- extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.
How are inflation and unemployment related?
As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.
What is GDP? Real vs. Nominal GDP?
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
Real GDP is adjusted for inflation. Nominal GDP is calculated using current prices, it does not require any adjustments for inflation.
Real GDP - The value of all final goods and services […], calculated using the prices of a selected base year.
Nominal GDP - The value of all final goods and services […], calculated using the prices current in the year in which the output is produced.
Why per capita?
Per capita because we want to isolate the effect of changes in the population. For example, other things equal, an increase in the population lowers the standard of living for the average person—there are now more people to share a given amount of real GDP. An increase in real GDP that only matches an increase in population leaves the average standard of living unchanged.
Labour productivity
Output per worker
Why don’t we put more people from the population to work?
The answer is, yes, but . . . . For short periods of time, an economy can experience a burst of growth in output per capita by putting a higher percentage of the population to work. Over the longer run, however, the rate of employment growth is never very different from the rate of population growth.
In general, overall real GDP can grow because of population growth, but any large increase in real GDP per capita must be the result of increased output per worker. That is, it must be due to higher productivity.
Explaining growth in productivity: (3)
1) Physical capital consists of human-made resources such as buildings and machines. (shovel vs machine)
2) Human capital is the improvement in labour created by the education and knowledge embodied in the workforce.
3) Technological progress is an advance in the technical means of the production of goods and services.
The aggregate production function
- A function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology.
- aggregate production function exhibits diminishing returns to physical capital when, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.
- It’s important to realize that diminishing returns to physical capital is an “other things equal” phenomenon: additional amounts of physical capital are less productive when the amount of human capital per worker and the technology are held fixed. Diminishing returns may disappear if we increase the amount of human capital per worker, or improve the technology, or both at the same time the amount of physical capital per worker is increased.
Why growth rates differ among countries? (10)
economies with rapid growth tend to be economies that add physical capital, increase their human capital, or experience rapid technological progress. Evidence also points to the importance of government policies, property rights, political stability, and good governance in fostering the sources of growth, savings and investment spending, upgrade their educational level, and make fast technological progress.
Savings and Investment Spending
countries add different amounts to their stocks of physical capital because they have different rates of savings and investment spending. Where does the money for high investment spending come from? Investment spending must be paid for either out of savings from domestic households or by savings from foreign households—that is, an inflow of foreign capital.
Education
A country’s economy becomes more productive as the proportion of educated workers increases since educated workers can more efficiently carry out tasks that require literacy and critical thinking. … As a result, many countries provide funding for primary and secondary education to improve economic performance.
Research and Development
spending to create and implement new technologies. But science alone is not enough: scientific knowledge must be translated into useful products and processes. And that often requires devoting a lot of resources to research and development, or R&D, spending to create new technologies and apply them to practical use. Although some research and development is conducted by governments, much R&D is paid for by the private sector
infrastructure
Roads, power lines, ports, information networks, and other underpinnings for economic activity
ROLE OF THE GOVERNMENT IN ECONOMIC GROWTH (7)
- Governments can play an important role in promoting—or blocking—all three sources of long-term economic growth: physical capital, human capital, and technological progress.
- GOVERNMENT SUBSIDIES TO INFRASTRUCTURE: Governments play an important direct role in building infrastructure: roads, power lines, ports, information networks, and other large-scale physical capital projects that provide a foundation for economic activity. Poor infrastructure, such as a power grid that frequently fails and cuts off electricity, is a major obstacle to economic growth in many countries. To provide good infrastructure, an economy must not only be able to afford it, but it must also have the political discipline to maintain it. Perhaps the most crucial infrastructure is something we, in an advanced country, rarely think about: basic public health measures in the form of a clean water supply and disease control.
- GOVERNMENT SUBSIDIES TO EDUCATION In contrast to physical capital, which is mainly created by private investment spending, much of an economy’s human capital is the result of government spending on education. Government pays for the great bulk of primary and secondary education.
- GOVERNMENT SUBSIDIES TO R&D Technological progress is largely the result of private initiative. But in the more advanced countries, important R&D is done by government agencies as well
- MAINTAINING A WELL-FUNCTIONING FINANCIAL SYSTEM Governments play an important indirect role in making high rates of private investment spending possible. Both the amount of savings and the ability of an economy to direct savings into productive investment spending depend on the economy’s institutions, especially its financial system. In particular, a well-regulated and well-functioning financial system is very important for economic growth because in most countries it is the principal way in which savings are channelled into investment spending. If a country’s citizens trust their banks, they will place their savings in bank deposits, which the banks will then lend to their business customers. But if people don’t trust their banks, they will hoard gold or foreign currency, keeping their savings in safe deposit boxes or under the mattress, where it cannot be turned into productive investment spending. As we’ll discuss later, a well-functioning financial system requires appropriate government regulation to assure depositors that their funds are protected from loss.
- Protection of Property Rights Property rights is the rights of owners of valuable items to dispose of those items as they choose. A subset, intellectual property rights, are the rights of an innovator to accrue the rewards of her innovation. The state of property rights generally, and intellectual property rights in particular, are important factors in explaining differences in growth rates across economies. Why? Because no one would bother to spend the effort and resources required to innovate if someone else could appropriate that innovation and capture the rewards. So, for innovation to flourish, intellectual property rights must receive protection.
- Political Stability and Good Governance - Long-run economic growth in successful economies, like that of the United States, has been possible because there are good laws, institutions that enforce those laws, and a stable political system that maintains those institutions. Even when the government isn’t corrupt, excessive government intervention can be a brake on economic growth. If large parts of the economy are supported by government subsidies, protected from imports, subject to unnecessary monopolization, or otherwise insulated from competition, productivity tends to suffer because of a lack of incentives.
Sustainable long-run economic growth
long-run growth that can continue in the face of the limited supply of natural resources and the impact of growth on the environment.
