Topic 6

Question 1

Long run economic growth- how does it happen

Answer 1

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

Question 2

what is the best measure of standard of living

Answer 2

REAL gdp per person (real gdp per capita)

Question 3

What is real gdp per captia

Answer 3

the amount of prodcution in teh economy per person adjusted for changes in the price levelover timee

Question 4

what can long run econ growth be measured throuh

Answer 4

increases in real gdp per capita

Question 5

higeher rate of economic growth means?

Answer 5

higher standards of living

Question 6

What is an economic growth model

Answer 6

explains growth rates in real gdp per capita over the long run

focuses on the causes of long run increase in labour productivity

Question 7

what determines long run growth

Answer 7

LABOUR PRODCUTIVITY (QUANITTY OF G/S that can be prodcued by 1 worker or by 1 hour of work)

Question 8

what determines labour productivtiy

Answer 8

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

Question 9

Production Function MEANING

Answer 9

Methods for transorming inputs into output

ingredients for a cake, and water, and human skills, and oven to A CAKE

Question 10

Productino function formula

Answer 10

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

Question 11

break up the production function [A]

Y= AF(L,K,H,N)

Answer 11

THE A (level of tech) directly effects output a LOT

increase in the level of technology directly increases output

Question 12

break up the production function L K H N

Y= AF(L,K,H,N)

Answer 12

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 %

Question 13

The production function

2Y = AF(?L,?K,?H?N)

Answer 13

2 TO EVERYTHING

Question 14

How to use the production function to showcase production/output per worker

Answer 14

DIVIDE THE UFNCTION BY L

Y/L = AF(L/L,K/L,H/L,N/L)

Y/L IS LABOUR PER ONE WORKER

Question 15

SO accoridng to production function, what determines prodcutivity and growth rate?

Answer 15

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

Question 16

production function visual

Answer 16

like a radical graph

capital per worker on x axis
output per worker on y axis

Question 17

per-worker prodcution function (Y/L)

Answer 17

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

Question 18

per owrkers production function (Y/L) _ LAW OF DIMINSHING RETURNS

Answer 18

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!!!

Question 19

what causes per worker production funciton to shift up

Answer 19

ONLY TECH CHANGE!!!

this is the only way eocnomy can produce more rela gdp per hour with same quantity of capital per hour

Question 20

How is dimishing returns visualized of production function

visually
mathematically

Answer 20

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)

Question 21

since there is diminishing reutnrs to capital, continually increasing real gdp per hour worked can only be sustained when

Answer 21

when there is tech change

Question 22

when WILL AN ECONOMY EXPERIENCE INCREASES IN SOL

Answer 22

ONLYYYYYYYYYYYYYYYY IF REAL GDP PER HOUR WORKED INCREASES

Question 23

IN LONG RUN WHEN WILL ECONOMY EXPIERINCE INCREASNIG SOL

Answer 23

ONLYYYYYY WHEN IT EXPERIENCES CONTINUING TECH CHANGE!!!!!!

Question 24

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

Answer 24

a large output

a small output

law of idminising returns

Question 25

what can govt od ot promote long term econ growth

Answer 25

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

Question 26

how to increase physical cpaital per worker (K/L)

how do govts promote this?

Answer 26

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)

Question 27

why do low income countries not grow
(in regards to savings and investment)

(k/l)

Answer 27

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

Question 28

what does econ growth model predict

Answer 28

that poor countries will grow faster than rich countriess

ADDITIONAL CAPITAL IS GREATER FOR COUNTRIES WITH SMALLER CAPITAL STOCKS

“CATCH UP”

Question 29

“CATCH UP” (K/L)

Answer 29

The level of GDP per capita/incme per capita in poor countries will grow faster than in rich countries
ECON GROWTH MODEL

Question 30

What does catch up line look like

Answer 30

a negative slope line
y axis has growth in real gdp per capita

x axis has initial level of real gdp per capita

Question 31

What is FDI related to in economic growth

Answer 31

KAPITAL (phhysical capital)

Question 32

Foreign investment
2 types
how does it help developing country

Answer 32

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)

Question 33

How do goverments increase human capital for workers

2

Answer 33

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)

Question 34

How do governments sustain econ growth through Tech change

Answer 34

TECH CHANGE IS MOST IMPRORTANT !!! SHIFTS PF UPWARDS!

they do this via research and deveoplmetn

Question 35

Research and developmet -Paul Romer New growth theory

Answer 35

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@@

Question 36

how can govt increase the quantity of research and development

Answer 36

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

Question 37

what are two government only things that are important in economic growth

Answer 37

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

Question 38

How do natural resources limit econ growth

Answer 38

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.

Question 39

How does ‘L’ affect econ growth

Answer 39

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

Question 40

what does pop growth

Answer 40

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