Topic 6 Flashcards
Long run economic growth- how does it happen
BECAUSEE rising productivity increases the avg standard of living
increasing prodcution of goods and services faster than population frows- increases standard of living of the avg person
what is the best measure of standard of living
REAL gdp per person (real gdp per capita)
What is real gdp per captia
the amount of prodcution in teh economy per person adjusted for changes in the price levelover timee
what can long run econ growth be measured throuh
increases in real gdp per capita
higeher rate of economic growth means?
higher standards of living
What is an economic growth model
explains growth rates in real gdp per capita over the long run
focuses on the causes of long run increase in labour productivity
what determines long run growth
LABOUR PRODCUTIVITY (QUANITTY OF G/S that can be prodcued by 1 worker or by 1 hour of work)
what determines labour productivtiy
1 physical capital: stock of equipment and structures that are used in production
2 human capital: knowledge and skills workers acquire
3 nat res: inoutes into prod from nature
4 tech change: change inn q output a firm can produce given q inputs
Production Function MEANING
Methods for transorming inputs into output
ingredients for a cake, and water, and human skills, and oven to A CAKE
Productino function formula
this function is a fraph or an equation sowing relation bw outputs and inputs
Y=AF(L,K,H,N)
A (level of tech)
F THIS IS THE F(x) part
L abour
K apital (physical capital)
H uman
N at res
break up the production function [A]
Y= AF(L,K,H,N)
THE A (level of tech) directly effects output a LOT
increase in the level of technology directly increases output
break up the production function L K H N
Y= AF(L,K,H,N)
The function F(x) is a function f of l k h n shows how all inputs are combined to prodcue output
if you hold level of technology (A) fixed, the production function will have constant returns to scale
IFYOU CHANGE ALL INPUTS BY SAME % THIS WILL CAUSE OUTPUT TO CHANG EBY THAT %
The production function
2Y = AF(?L,?K,?H?N)
2 TO EVERYTHING
How to use the production function to showcase production/output per worker
DIVIDE THE UFNCTION BY L
Y/L = AF(L/L,K/L,H/L,N/L)
Y/L IS LABOUR PER ONE WORKER
SO accoridng to production function, what determines prodcutivity and growth rate?
Increases in
K/L = more physical capital more productive
H/L = more knwoledge and skill more prod
N/L = more nat res per worker more product
A = more tech more productivity
production function visual
like a radical graph
capital per worker on x axis
output per worker on y axis
per-worker prodcution function (Y/L)
describes the relationship between real gdp per worker (or real gdp per hour worked) and capital per worker or capital per hour worked
AND IT ALSO HOLDS OTHES FACTORS OF PRODCUTION CONSTANT
per owrkers production function (Y/L) _ LAW OF DIMINSHING RETURNS
When you increase one factor of prodcution while keepign others constant, output increases by smaller additional amounts [BECAUSE if you increase machinery per worker but not knowledge or ksill, its pointless]
increase in capital per hour worked leads to diminishing increases in output per hour!!!
what causes per worker production funciton to shift up
ONLY TECH CHANGE!!!
this is the only way eocnomy can produce more rela gdp per hour with same quantity of capital per hour
How is dimishing returns visualized of production function
visually
mathematically
the curve rises steeply but bows down and flattens
mathematically: same increases in x axis (capital per hour worked) lead to smaller and smaller increase in y axis (otput)
since there is diminishing reutnrs to capital, continually increasing real gdp per hour worked can only be sustained when
when there is tech change
when WILL AN ECONOMY EXPERIENCE INCREASES IN SOL
ONLYYYYYYYYYYYYYYYY IF REAL GDP PER HOUR WORKED INCREASES
IN LONG RUN WHEN WILL ECONOMY EXPIERINCE INCREASNIG SOL
ONLYYYYYY WHEN IT EXPERIENCES CONTINUING TECH CHANGE!!!!!!
When economy has a low elvel of capital, an extra unit of capital leads to what
when the economy has a high level of capital, the extra unit of capital leads to what
a large output
a small output
law of idminising returns
what can govt od ot promote long term econ growth
the key is to increase productivity and living standards, how??
adopt policies that lead to larger stocks of physical and human capital /worker and to LARGER STOCK OF TECH KNOWLEDGE
how to increase physical cpaital per worker (K/L)
how do govts promote this?
INVESTMENT! save more money, and consume less today (Lower consumption, more money saved, more money for firms to borrow to use in investing)
tax incentives to increase savings and investment (
a.Tax defeered savings plan for terirement making people wanna save,
b.investment tax credits increase incentives for firms to invest in physica lcapital)
why do low income countries not grow
(in regards to savings and investment)
(k/l)
wars/revolutions make it difficutl for coutnries to be wealthy
households cant save money bc low incomes, less funds avaiable for companies to borrow and invest in phsycial capital needed for econ growth
insecure financial systems in developing countries lead to low rates of saving and incestment
what does econ growth model predict
that poor countries will grow faster than rich countriess
ADDITIONAL CAPITAL IS GREATER FOR COUNTRIES WITH SMALLER CAPITAL STOCKS
“CATCH UP”
“CATCH UP” (K/L)
The level of GDP per capita/incme per capita in poor countries will grow faster than in rich countries
ECON GROWTH MODEL
What does catch up line look like
a negative slope line
y axis has growth in real gdp per capita
x axis has initial level of real gdp per capita
What is FDI related to in economic growth
KAPITAL (phhysical capital)
Foreign investment
2 types
how does it help developing country
country can avoid low savings and investment through foreing investment
FDI: when corporations build facilities in foreign countries (foreigns own and oeprate physical capital and employ workers)
Foreign portfolio investment: occurs when an individual or firm buys stock or bonds isuesd in another countrry (forgeings lend funds to domestic investors to get capital, make dom producersmore productive)
How do goverments increase human capital for workers
2
EDUCATION (govt subsidies for education play important role in eocn growth)
-Education prevents brain drain (high skilled workers go to high income countries)
HEALTH CARE (more health more productive)
How do governments sustain econ growth through Tech change
TECH CHANGE IS MOST IMPRORTANT !!! SHIFTS PF UPWARDS!
they do this via research and deveoplmetn
Research and developmet -Paul Romer New growth theory
long run econ growth is rooted in knowledge capital!!!
physical capital has diminishing returns bc it is a private good!! knowledge cpaital is a public good and it only increases everyones returns@@
how can govt increase the quantity of research and development
1) protect I P with patents and copyrirhgts
2) conduct research
3) subsidize research by proiving grants
4) provide tax benefits to firms that invest in r&d
what are two government only things that are important in economic growth
PROPERTY RIGHTS AND THE RULE OF LAW
Property right: rights individuals or firms have to exclusive use of property THAT HTY ECREATE
rule of law: ability of govt to enforce the laws of coutnry, INDEPENDANT COURT SYSTEM SHOULD ENFORCE CONTRACTS
How do natural resources limit econ growth
depletion of non-renewable nat res!!!
As a resource becomes scarcer, its market price rises, which increases
the incentive to conserve it and develop alternatives.
How does ‘L’ affect econ growth
Population growth (increasing L) might limit growth by
Reducing the quantity of capital per worker.
⇒ lower productivity ⇒ lower GDP per worker.
Depleting the non-renewable natural resources
what does pop growth
Population growth (increasing L) means
Increasing in the size of labour force.
⇒ more workers to produce goods and services.
I Promoting technological progress
⇒ more scientists, inventors, engineers.
⇒ more frequent discoveries.
⇒ faster technological progress and economic growth
