Term 2 week 1 Economic growth

Question 1

What is the measure of economic activity?

Answer 1

Agregate output / GDP

Question 2

What is the definition of GDP?

Answer 2

The market value of final goods and services produced in an economy in a given year

Question 3

How can GDP be made more accurate?

Answer 3

Real GDP per Capita for PPS

Real = adjusted for inflation
per capita = per person
PPPs adjusted for different buying power between countries.

Question 4

What is the long term trend of GDP

Answer 4

-Before 1800s GDP was stagnant and low, countries only had differences of 3-4 multiples
-After 1800s GDP started to. have sustained increases and factors of 12-15

Question 5

What are the advantages and disadvantages of using GDP as a measure?

Answer 5

-Important for welfare as those with the highest productive capacity can produce medical equipment
-easily comparable between countries
-GDP is correlated with wellbeing, HDI and satisfaction

-Not all utility is derived from consumption
-higher GDP can mean inequality and emissions.

Question 6

What is the difference between exogenous and endogenous

Answer 6

Exogenous - taken as given
Endogenous - given in the model

Question 7

What is the most simple economy production framework?

What is the production function in this?
What are the parts in this

Answer 7

-Single - closed economy no trade
One consumption good
The households are exogenous
Two inputs - labour and capital

-Cobb douglas
A bar . K^alpha . L ^ 1-alpha
A is TFP, total factor productivity
K is capital
L is labour
alpha controls the importance of capital and labour in production

Question 8

What are the properties of the most simple cobb douglas production function

Answer 8

It is increasing in both capital and labour
dF/dK > 0 , dF/dL > 0

Decreasing marginal product
d^2F/dK < 0 d^2F/dL< 0
As you keep increasing capital and labour the additional unit of output it creates is decreasing.

Constant returns to scale function
if you capital all inputs by a factor the output is

Inputs are not perfect substitutes

Question 9

What is an isoquant

Answer 9

A curve that shows the combination of inputs for a fixed level of output

Question 10

How can you justify the CRS function?

Answer 10

Replication argument if you duplicated it output would double.

Question 11

How do we get output per worker in production function

Answer 11

divide both sides by L…. Y = A bar . K^alpha . L^1-alpha

Y/L = Abar . K ^ alpha . L ^ 1-alpha divide by L

gives A bar K ^ alpha . L -alpha
A bar (K/L)^alpha

Y/L = k^alpha as K/L is output per worker.

Question 12

How can we differentiate per worker quantities?

Answer 12

lower case y

Question 13

what is the profit maximisation problem of firms

Answer 13

pi = revenues - costs

pi = pY - rK - wL

pi = profit
p =price
Y = output
r = rental rate of capital
K = capital
w = wage
L = labour

Question 14

Set up the profit maximsation problem
what are the f.o.c

what do these imply

Answer 14

Price = 1
Perfect competitions - firms are price takers
rental wage and wage rate are taken as given

They maximise profit by choosing quantity of labour and capital to use

Max Abar . K^alpha . L^1-alpha - rK - wL

FOC
MPK = MCK
alpha .Abar(K/L)^1-alpha = r

MPL = MCL

1-alpha . Abar(K/L)^alpha = w

Firms demand capital and labour up to the marginal product = marginal cost.

Question 15

What are the assumptions about households in the simple production economy?

Answer 15

-Households supply of labour and capital and demand the produced quantity

Supply curves are inelastic

Question 16

What does it mean if K and L have a bar on them

Answer 16

It means that they are given exogenously

Households demand the entire production

Question 17

How can you show graphically the capital and labour market

Answer 17

Capital market:
quantity of capital x axis
rental rate of capital y axis
inelastic supply of capital
downward sloping demand for capital

labour market
quantity of labour x axis
rental

Question 18

What can we say from the general equilibrium of the normal production model?

Answer 18

-firms employ all supplied labour and capital in the economy (no unemployment)

-The equilibrium wage is proprtion to output per worker.

-Firms make zero profit due to perfect competition.
All income is paid as remuneration to capital and labour.

Question 19

How do you denote the equilibrium of something

Answer 19

you put r*

Question 20

How do you calibrate alpha and 1-alpha

Answer 20

you use the optimality conditions and make them = to alpha and then 1-alpha

Question 21

What happens when you compare the production model y = k^alpha to the data and TFP is same for all countires?

What implication does this have on the model?

Answer 21

-The model over predicts the differences in GDP per capital.

It under predicts caps in cross country GDP

-The TFP should be different for countries

Question 22

What is TFP?

Answer 22

The efficiency with which inputs are turned into outputs.

Amount of output not explained by the inputs in production

Question 23

When trying to find TFP using data what does it show?

What is another way of calling TFP?

Answer 23

Strong relationship between GDP and TFP.

Solow residual

Question 24

From data what explains the difference between rich and poor countries?

Answer 24

inputs account 1/3 of gaps
TFP accounts for 2/3 gaps

Question 25

Why are there differences between countries in TFP?

Answer 25

• Technology - wifi speed
  -Human capital - level of education
  -Institutions - contracts/legislation/competition
  -Cultures -

Question 26

What does the Malthusian model try and explain?

Answer 26

Why up until 1800s we had very minimal growth

Question 27

What was the Malthusian theory?

Answer 27

Any technological progress for producing food would lead to population growth

The higher population would then reduce the substinence per worker

The population and agregate level of consumption could grow but unless there were any limits on population growth there would be no-long run growth.

Question 28

What is the production in the Malthus model?

Answer 28

Yt = A bar K^alpha . Kt^alpha . Lt^1-alpha
Yt = food which is perishable from period to period
Kt as being land is in fixed supply kt = kbar

Question 29

How do households behave in the malthusian model

What is the main difference?

Answer 29

Households earn income from labour and capital , which they use for consumption

Population is endogenously determined

Lt+1 = Lt + births - deaths

can also use birth and death rate
Lt+1 = Lt + Lt(Birth rate - death rate)

Question 30

What is birth rate and consumption per capita?

What is death rate?

Answer 30

ct = Ct/ Lt

Birth rate is an increasing function of consumption

Death rate is a decreasing consumption of consumption

Question 31

How can we write t+1 population in Malthusian model?

what must be stipulated about the growth rate of consumption?

Answer 31

Lt+1 = Lt g(ct)
g(.) is a growth factor of population
Lt+1/ Lt = g(ct)
g(ct) = C^lamda where lamda is between zero and 1

Question 32

How does a change in TFP change the malthusian model graphically?

Question 33

What is the household consumption graph?

Answer 33

X axis consumption per worker
Y axis Population growth

Upward sloping line labelled g(c)

Question 34

What happens in equilibrium to the Malthusian Market?

Answer 34

It clears Ct = Yt

Question 35

How can the fact that markets clear be added to the Malthusian consumption model?

What is important about capital in this model?

What does this tell us for population growth?

Answer 35

you sub in yt for ct

Lt+1 = Lt . g(yt)

then sub in the production function for output per worker

yt = A bar . (K bar/L)^alpha

As capital s fixed when population increases growth rate goes down.

Question 36

How can we express the malthusian model as a growth rate of population in terms of a factor of consumption?

Answer 36

Lt+1 / Lt = g(A bar (Kbar/ Lt)^alpha

Question 37

What is the graph that shows the dynamics of a Malthusian economy?

What does it show?

Answer 37

X axis Population time t
Y axis population time t+1
45* line and then g(c)

Shows that the economy will converge to a steady state.

if Lt is less than L* then there is a large consumption per worker so increase in population

If Lt is more than L* there is a small consumption per worker which makes it go back to steady state.

Question 38

What is important about steady state growth rate?

Answer 38

Lt = Lt + 1 = L*

Lt/ Lt+1 = 1

Question 39

In the long run equilbirium for Malthusian model how do you find
C*
c*
k*

Answer 39

C* = A bar . Kbar ^ alpha . L* ^ 1-alpha
c* = C* / L*
k* = Kbar / L*

Question 40

In the steady state equilibrium of the Malthusian model

Answer 40

what are the two graphs for consumption and capital

1. X axis consumption per worker
   Y-axis population growth per worker
   upward sloping diminishing line
2. X axis capital per worker
   Y axis capital per worker
   upward sloping diminishing line

Question 41

What denotes the steady state?

Answer 41

anything *

Question 42

If TFP increases (improvement in agricultural techniques) what happens to Malthusian model?

Explain this with lilly pads and explain with graph?

Answer 42

No effect on steady state consumption per worker.

Lilly pad:

TFP increases, with the same amount of capital more consumption

This means more land for people

This increases population growth

This then erodes the increased consumption

Therefore steady state stays the same.

Graphically consumpiton per worker and population graph stays the same

Graph with capital per worker and
consumption per worker.
TFP causes the graph to shift up.

The steady state population increases

Question 43

In malthusian model does it adjust to new steady state instantly?

Answer 43

No, it takes time for consumption to adjust to new steady state.

Question 44

How does new population adjust in steady state.