Topic 3 - Economic Growth Flashcards
1
Q
What is economic growth
A
- A sustained expansion in productive capacity of the economy
- Based on real GDP per person
- Measured by calculating growth rates
2
Q
How is the growth rate calculated
A
- 100 x ((GDP current year - GDP previous year) / GDP previous year)
- Real GDP per person in this calculation
2
Q
What does the Aggregate production function show us and how is it formulated
A
- How real GDp is produced using the factors of production
- Y = K^a * L^1-a
- 0<a<1
2
Q
What are the three main theories of economic growth
A
- Malthusian growth theory
- Neoclassical growth theory
- Endogenous growth theory
3
Q
How does raising K and L influence GDP
A
- Increasing K or L raises real GDP
- But Y rises less with each increase: diminishing returns
3
Q
What does Malthusian growth theory state
A
- That growth in real GDP leads to population growth that holds back real GDP per person
- Explains the flat portion of the “hockey stick”
4
Q
How does Neoclassical growth theory work
A
- It adds savings into the picture (K = sL)
- As GDP rises, income is saved. As savings increase so does K leading to no diminishing returns
- Also includes productivity in the form of A, A growth will drive Y increase
5
Q
What is the main idea for endogenous growth
A
- Productivity is determined by a set of inputs
- A = f(Human capital, R&D, Institutions)
- Increases in the inputs raise productivity
6
Q
What policies aid endogenous growth
A
- Education and training
- Subsidies for R&D
- Improvenments in institutions
7
Q
What stops poor countries from growing
A
- The poverty trap
- Large increases in P are needed in order to escape
8
Q
How can we approximate growth rate without population growth rate
A
- (Ln(Real GDP p.p) - Ln(Real GDP p.p previous)) x 100
9
Q
What is the ratio rule
A
- Approximate growth rate of a ratio is the difference in growth rates
- Growth in Real GDPp.p = Real GDP growth - Pop growth
10
Q
What is the rule of 70
A
- The number of years it takes for a variable to double is approx 70 divided by the annual growth rate of the variable
11
Q
What is significant about small improvenments in growth
A
- Small improvenments in growth can cause big gains due to compound growth
12
Q
What is the compound growth formula for GDP
A
- GDP in n years = (1 + g)^n * GDP today
