theme3 Flashcards
link between GDP and living standard
Increase in GDP doesn’t mean an increase in living standards and well-being, but great indicator
All high living standard economies have high productivity
Proportion of the world’s population in extreme poverty has decrease because:
- International and domestic cooperation (acts like income redistribution)
- Institutions and government programs
- Industrialisation
- Structure of economies
- Free trade and Free market
Less deaths by famine because:
- Economies of scale
- Technology
- Structure (markets)
Why income inequalities between countries
- Different growth rates
- Education, health care system, etc.
- National resources (infrastructures)
- Cultural characteristics (weather)
Free trade: Produce more made in Qc goods (benefits and costs)
Benefits:
- Employment
- Increase GDP by decreasing Imports
- Independence
- Quality control/Regulation
Costs:
- Consumers pay more
- higher Cost of production
- Decrease Quality (in some industries)
- Decrease Productivity (force workers to work in another sector)
- Decrease International relations
Compound effect of growth
higher annual growth increases the “growth base” exponentially. Small differences in growth can result in huge differences in living standards 50 or 100 years later
Y = Y/H * H/E *E/pop * pop
Y = total production
H = total number of hours worked in the whole economy
E = number of jobs (number of people employed)
pop = total population
Y/H : Output per hour worked (hourly productivity)
H/E: Number of hours worked per job
E/pop: proportion of total population that is employed
Pop: total population
Labour input
total hours worked of all persons engaged in production
Labour productivity
Partially reflects the productivity of labour in terms of the personal capacities of workers or the intensity of their effort.
variables in the GDP decomposition
- Output per hour worked (hourly productivity) Y/H
- hours worked per job H/E
- proportion of the total population that works E/pop
- total population POP
Growth in living standards
is what determines the LT material conditions of life in an economy.
Y/pop = Y/H H/E E/pop
3 fundamental ratios that explain the evolution of living standards in the LR:
- Productivity
- Hours worked per job
- Proportion of total population employed
Only productivity is unbounded which makes it the only possibility for growth in living standards in LR
Effect of productivity
increase profit; increase purchasing power of shareholders; increase employees’ salaries; decrease working hours; decrease price paid by consumers; increased living standard
Process of economic development
Increased in purchasing power;
This becomes savings and returns & demand for other goods;
Generates income for firms and workers in other sectors;
Incites to produce, innovate, etc.
Production possibilities curve:
Opportunity cost increase as more of either good is produced
Diminishing marginal return:
If at a low level of production of X, will have to sacrifice little Y to produce 1 more X.
If at a high production of X, will have to sacrifice a lot of Y.
To increase productivity in Qc
-Decrease minimum wage
- Increase subsidy to students
-Increase mobility
-Increase immigration
- Infrastructures
-R&D
Comparative advantage
Has a comparative advantage when its opportunity cost of producing that good is lower than that of other trading partners (to produce on unit of X, the economy must sacrifice fewer resources allocated to the production of other goods exchanged in trade.
Cost of production of a unit of “X” = Its opportunity cost (what we have to give up to produce X)
Total Net Gain
The quantity of goods and services per capita for the 2 combined economies has necessarily increased: GDP per capita has increased for the 2 countries combined.
2 characteristics of production function
- Constant returns to scale: if increase all factors of production by x. output also increase by x
- Diminishing marginal returns: an increase in ONE factor of production by x increases GDP by less than x
Labor productivity (Y/L) depends on 4 fundamental factors
- A: level of technological advancement
- K/L: capital per worker
- Kh/L: human capital per worker
- N/L: Natural resources per worker
Convergence of living standards:
Low-productivity, high-standard economies should have high productivity and living standards growth rates for a given increase in capital per worker,
While high-productivity, high-standard economies would have low productivity and living standards growth rates for the same given increase in capital per worker
Phenomenon of convergence
economies with lower productivity and living standards should have higher growth rates, while economies with higher productivity and living standards should have lower growth rates.
Convergence is the result of diminishing marginal returns and diffusion of technology
Appears to be a convergence of living standards between economies that are relatively comparable in terms of institutions, human capital, etc
Policies for Prosperity:
- Institutions: less corruption, when can rely on it it foster innovation
- Opening up the economy: inside and outside the country
- Competition: innovate, try to be the best
- Economic freedom: consumers are happier and more satisfied
- Property rights: rely on justice system, respect law, crucial for free market, if not, why would you work hard?
- Taxation: to keep institutions running, if too high: stop working so kills taxation
- Human capital: education, training lead to economic growth
- Basic infrastructures: roads, water, etc.
- R&D
- Health and institutions: more healthy, more productive
K calculation
Kt = Kt-1 + It-1 - depreciationt-1
= Kt-1 + sYt-1 - dKt-1
= sYt-1 + (1-dKt-1)
Stationary point
when all savings are used for the maintenance and replacement of existing capital and NOT for the accumulation of new productive capita.
I = 0, sY = dK (savings = capital depreciation)
Movement of production curve
- Increase in the savings rate: Shift along the production curve
- Increase in human capital: Shift production curve upwards
- Increase of “A” by innovation: Shift of the production curve upwards
Solow model and stationary point:
Kt=sYt-1 + (1-d) Kt-1
How can stationary point shift?
can shift its stationary point to higher income with a rise in the technological level “A” or a rise in human capital Kh, which shifts the whole Y curve upwards AND also the savings curve sY.
The growth driven by savings that allows the accumulation of physical capital is limited, since the savings rate “s” is bounded by 1. It is therefore only innovation (which makes “A” grow) and/or human capital that can ensure growth in the very long term
Unit labour cost
= (Nb of employees * Salary per workday)/Nb of unit produced per day
Net investment
Inet = I – dK
