The real economy in the long run Flashcards
What does a country’s standard of living depend upon?
Its ability to produce goods and services
The rate of what varies greatly?
Growth
What do the poorest countries have that the UK has not seen for many decades?
Average levels of income that haven’t been seen in the UK for a very long time
What does productivity play a key role in?
Productivity plays a key role in determining living standards for all nations in the world
What does productivity refer to?
The amount of goods and services that a worker can produce for each hour of work
What is needed to understand the large differences in living standards?
The production of goods and services
What is meant by factors of production?
These are the inputs used to produce goods and services
What are 4 factors of production?
Physical capital
Human capital
Natural resources
Technical knowledge
What type of factor of production is physical capital?
It is a produced factor of production
What is meant by “produced factor of production”?
An input into the production process that in the past was an output from the production process
Define physical capital
The stock equipment and structures used to produce goods and services
Give three examples of physical capital
Tools used to build or repair vehicles
Tools used to build furniture
Office buildings, schools etc
Define human capital
Term for the knowledge and skills that workers acquire
What 3 things are examples of knowledge and skills workers acquire as part of human capital?
Education
Training
Experience
What is human capital similar to and why?
It is similar to physical capital. It raises a nation’s ability to produce goods and services
Define natural resources
Inputs used in production that are provided by nature such as land, rivers and mineral deposits
What are the two main categories of natural resources?
Renewable and non-renewable
Give two examples of non-renewable resources
Coal
Petroleum
Give two examples of renewable resources
Trees and forests
How important are natural resources to the economy?
They can be important but aren’t necessary for an economy to be highly productive in producing goods and services
Define technical knowledge
Society’s understanding of the best ways to produce goods and services
What does human capital refer to?
The resources expended to transmitting this understanding to the labour force
How do productivity and living standards improve?
Governments use policies
Give 6 government policies used to raise productivity and living standards
Encourage investment from abroad Encourage saving and investment Establish secure property rights and maintain political stability Promote free trade Promote research and development Encourage investment and training
What is another way to raise future productivity?
To invest more of current resources into the production of capital
What does investing more of current resources into the production of capital mean that we have to do?
We have to consume less today in order to save more
What is the aggregate production function determined by?
This is determined by technology and capital and labour productivity for a given level of physical capital stock
What does the savings rate determine?
The level of investment
How can you find the level of GDP consumption from the aggregate production function
It is the difference between the aggregate production function and investment
What is an increasing physical capital stock associated with?
An increasing physical capital stock is associated with rising GDP
Why does GDP increase from increasing physical capital slow?
Because of diminishing marginal product
Explain the property of diminishing returns
As the stock of capital rises, the extra output produced from an individual unit of capital falls
What happens as a result of diminishing returns?
There is an increase in the saving rate which leads to a higher growth only for a while
What does a higher saving rate lead to in the long run?
A higher saving rate leads to a higher level of productivity and income, but not to a higher growth of these
What does the catch up effect refer to?
This refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
How can governments increase capital accumulation and long-term economic growth?
By encouraging investment from foreign sources
What are 2 key types of investment from abroad?
Foreign Direct Investment
Foreign Portfolio Investment
What is FDI?
Capital investment owned and operated by a foreign entity
What is FPI?
Investments financed with foreign money but operated by domestic residents
What is an issue with investment from abroad?
The profits don’t end up in that country
Why is education important for long term growth?
Each year of education can increase a person’s wage which can improve their standard of living
How can an educated person benefit the economy?
By generating new ideas about how best to produce good and services
What is one issue as a result of lack of education in poor countries?
Brain drain
What can human capital investments refer to?
Investments in people such as improvements in improved health
What did Fogel conclude about per capita income and nutrition?
Improved nutrition accounted for almost a third of growth in per capita income
What do property rights refer to?
The ability of people to exercise authority over the resources that they own
What is an important prerequisite for the price system to work?
An economy-wide respect for property rights
What will a country that eliminates trade restrictions experience?
It will experience the same kind of economic growth that would occur after a major technological advance e.g a country that exports wheat and imports steel it would benefit in the same way as a if it had invented a way to turn wheat into steel.
Where do most technological advances come from?
Private research by firms and individual invenntors
How can the government encourage the development of new technologies?
Through research grants, tax breaks and the patent system
In what 3 ways does population growth interact with factors of production?
Stretching natural resources
Diluting the capital stock
Promoting technological properties
Why is the return to capital especially high in poor countries?
Because of diminishing returns
