Test #2 (chapter 9)

Question 1

What is the rule of 70?

Answer 1

The number of years for a variable to double = 70 / Annual growth rate of variable

*can only be applied to a positive growth rate
*even small differences in growth rates get magnified over time

Question 2

What are the sources of long-run growth?

Answer 2

*depends almost entirely on rising productivity
Labour productivity, often referred to simply as productivity, is output per worker (simple real GDP divided by the number of people working)

• Physical capital - human-made resources
• Human capital - education and knowledge
• Technology - advance in the technical means of production of goods and services
• even modest innovations like pre cut cardboard boxes can make huge improvements
  *most important

Question 3

What is the MPL?

Answer 3

Marginal productivity of labour = change in Y / change in L

Y = aggregate real output (GDP)
L = amount of labour used

Question 4

What is the aggregate production function?

Answer 4

It shows how the aggregate real output is produced using factors of production and technology
Y = A x F ( K, L, H )

A = total factor productivity (TFP) (can be attributed to technology)
K = physical capital
L = labour
H = human capital
Y = aggregate real output (GDP)
F = aggregate production function

Question 5

What is the per worker production function?

Answer 5

Shows how productivity depends on physical capital per worker and human capital per worker as well as that state of technology
Y/L = A x f (( K/L ), ( H/L ))

Y, K, and H, are put above L to make it per worker
Allows us to disentangle the effects of these three factors on overall productivity

Question 6

What is MPk, MPL, and MPh

Answer 6

marginal productivity of physical capital
(a small increase in K causes the amount of aggregate real output to rise by a marginal amount)

marginal productivity of labour

marginal productivity of human capital

Question 7

What is growth accounting?

Answer 7

Estimates the contribution of each factor in the aggregate production function to economic growth

–> growth accounting can be applied to either the aggregate or the per worker version of the production function

ex. graph example in class where we figure out how much of the growth from one line on the graph to the next is due to the change in physical/human capital or to technology

Question 8

What is total factor productivity? (A)

Answer 8

Accounts for output that is not result of K,L, or H
*measure of technology

If A rises, then aggregate real output will rise

Question 9

What do diminishing returns to physical capital mean?

Answer 9

All else constant (human capital per worker and the state of technology), each successive increase in K/L leads to a smaller increase in output per worker, or productivity

*while an increase in physical capital per worker might reduce the increase in productivity, it never goes below zero

Question 10

When does the production function shift when K/L is on the x axis?

Answer 10

if…
- H/L increases
- technology improves
- or both

*K/L increase will just put you on another point in the curve, not shift you up

Question 11

Describe the importance of natural resources

Answer 11

Other things equal, countries with abundant valuable natural resources have higher real GDP per capita than less fortunate countries

BUT

Historically, natural resources played a much more prominent role in determining productivity

In the modern world, human capital, physical capital, and tech matter more

Most economists believe that modern economies can almost always find ways to work around limits on the supply of natural resources
- One reason is that resource scarcity leads to high resource prices - so resource scarcity isn’t seen as too serious of a problem because we handle it fairly well and it won’t fundamentally limit long-run economic growth

Question 12

Why do growth rates differ?
ex. Asian miracle?

Answer 12

Savings and investment
- some countries are increasing their stock of physical capital much more rapidly than others, through high rates of investment spending
- Spending a large share of their GDP on investment goods helps fester a fast-growing economy
- Investment spending must be paid for either out of domestic (national - savings within the country) savings or out of foreign savings (savings that come from foreign countries - borrowing from abroad)

Education
- Example of spectacular long-run growth = high percentage of people over the age of 15 who can read and write

Research and development
- Scientific advances make new technologies possible
- Some conducted by governments but a lot is paid for by the private sector

asian miracle : in the 70s and 80s - asian countries grew like crazy after getting lots of new technology

Question 13

Describe the role of government in growth

Answer 13

Government policies
Subsidies to…
- infrastructure (poor health infrastructure = very bad for economic growth)
- education (human capital): government funding is the largest source of funding for universities and degree-granting colleges
- research and development

Maintaining a well-functioning financial system : 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 can lend to business customers and turn it into productive investment spending

Protection of property rights
- intellectual property rights = rights of innovators to accrue the rewards of their innovations - must receive protection for innovation to flourish

Political stability and good governance
- Even if the government isn’t corrupt, excessive government intervention can be a brake on economic growth

Question 14

What is the convergence hypothesis?

Answer 14

• middle income trap
• start by growing very fast, hit the middle income, and then stay there
• Differences in real GDP per capita among countries tend to narrow over time because countries that start lower tend to have higher growth rates → but starting lower is not guarantee of rapid growth

Question 15

What does “left behind by growth” imply?

Answer 15

• we assume that everyone from a country benefits from growth equally, but this is not true - creates winners and losers
• the real median income is not growing as fast as the real GDP per capita
• gap is increasing
  ex. scurvy rates in the US are increasing

HOPE:
- from a worldwide perspective, the most conspicuous aspect of recent growth has been the rise of a global middle class
- In canada wealth inequality is definitely rising, but it’s more complicated to tell on a global scale → inequality within many countries has gone up BUT inequality between nations has gone down

Question 16

Define long-run economic growth
What is the key statistic used to track economic growth?

Answer 16

A sustained increase in output per capita

Real GDP per capita

Question 17

Other things equal, an ________ in the population ________ the standard of living for the average person

Answer 17

increase

lowers

Question 18

Aggregate output for an economy is higher, other things equal, when…

Answer 18

More physical capital is used

More labour (workers) is used

More human capital is used

There’s technological improvements

*demonstrated with the aggregate production function

Question 19

Explain Thomas Malthus’ Essay on the Principle of Population

Answer 19

pessimistic prediction that as population grows, amount of land per worker declines, and so productivity will decline → unless we can make death rates high enough and birth rates low enough to prevent rapid population

Question 20

What is the productivity paradox?

Answer 20

A disconnect between what looks like rapid technological progress and actual productivity → expecting 21st century developments to produce an explosion in total factor productivity but it was actually more the developments in the period of 1962-1973

Question 21

What is a patent?

Answer 21

government-created temporary monopoly given to innovators for the use or sale of their innovations → temporary because they want innovators to have an incentive to invent, but they also want to eventually encourage competition

Question 22

Describe the growth rate trends of South Korea, Argentina, and Nigeria during 1960-2018

Answer 22

South Korea - amazing rise because of an economic miracle in east Asia

Argentina - very slow progress with repeated setbacks

Nigeria - no real growth until 2000 and by far the lowest GDP of the three

Question 23

Describe East Asia’s growth rate miracle from 1960-2018

Answer 23

• Took only 35 years to achieve growth that required centuries elsewhere
• Whole region of east asia has increased real GDP per capita by 6% per year, more than three times north america’s historical rate of growth
• Very high savings rates - increased amount of physical capital per worker
• Good and basic education - improved human capital
• AND technological progress

Demonstrates that economic growth can be especially fast in countries that are playing catch-up to other countries (convergence hypothesis)

Question 24

Describe Latin America’s growth rate disappointment from 1960-2018

Answer 24

• Abundant in natural resources
• Started off comparable to other economically advanced countries
• Much lower rates of savings and investment spending
• Irresponsible government policy - high inflation, bank failures
• Unable to grow through the adoption of technology developed elsewhere
• Education underemphasized
• Many economists thought there was excessive government intervention in markets

Question 25

Describe Africa’s growth rate troubles and promise from 1960-2018

Answer 25

• Slow and uneven economic growth in sub-Saharan Africa has led to extreme and ongoing poverty for many of its people
• Since 1995, growth rates across most of Africa are much higher, averaging about 5% if some big economies are excluded
• Many African countries have tackled the problem of political instability → wars inhibited growth in education and basic infrastructure
• Property rights are a major problem
• Other economists argue that their underdevelopment is because they are poor, and their poverty stems from extremely unfavourable geographic conditions → leading to many health problems

Question 26

Explain - is world growth sustainable?

Answer 26

Thomas Malthus’ views of the population paradox was correct for around 58 centuries, but technological progress and rapid accumulation of physical and human capital have allowed us to defy malthusian pessimism

Is sustainable long-run economic growth possible? → growth that can continue in the face of the limited supply of natural resources and with less negative impact on the environment

*Economists say that while there will be economic costs, those costs have been falling as technological innovation in clean energy sources advances

Question 27

Explain local environmental degradation and global environmental degradation

Answer 27

Local:
- affects a geographically limited area
- Can be greatly reduced when there is sufficient political will and resources devoted to finding a solution

Global:
- Climate change - harder to solve because policies must be implemented on a global scale and requires the cooperation of many countries
- Burning fossil fuels → greenhouse gas → extreme weather, rising sea levels, disruption of agriculture, etc.
- Estimated that the cost of unmitigated climate change will be 20% of world GDP by 2100, and most of this cost will fall to poor countries

Question 28

What is the paris agreement?

Answer 28

commitment by 196 countries, signed in 2015, to reduce their greenhouse gas emissions in an effort to limit the rise in the earth’s temperature to no more than 2 degrees celsius → Trump made plans to withdraw the US from the agreement