Week 1 - Growth Facts and Model of production Flashcards
Define GDP
GDP is the market value of final goods and services produced in an economy at a given time.
Define Real GDP
Real GDP is when we fix prices at a given baseline year and then compare what has happened to quantities over time as this shows us the ‘real’ GDP when prices are fixed.
Briefly explain growth over the very long run
- Up until about the 1800, GDP only differed only by a factor of 2/3 between rich and poor countries
- In the mid 1800’s The Great Divergence occurred, and now in the present GDP differs by a 15+ fold between richer and poorer countries.
Briefly state what happened to modern economic growth in the US
From 1870 - 2000, the US real capita per GDP rose by nearly fifteen-fold
Briefly explain why GDP is useful
- GDP is useful as its very easy to compare between different countries because it has an objective and consistent definition, and has a natural metric (money).
- It measures a countries productive capacity, a crucial factor for improvements in health and other welfare dimensions.
- Consumption is part of GDP as its a measure of income
- GDP is strongly positively correlated with several direct measures of well being.
Briefly explain the limitations of GDP
- Things which are important for SoL are no captured by GDP
- GDP does not measure things such as climate change inequality and working hours therefore does not show us if the growth is sustainable.
What is the link between GDP and other well being measurements such as HDI and the Self declared life satisfaction?
Strongly positively correlated, although its not perfectly correlated there is a strong link between GDP and standards of living.
What are the 3 assumptions of our production function?
- Single, closed economy (no international trade)
- One consumption good
- Two inputs: Capital (K) and Labor (L)
Describe the Cobb Douglas Production function
- Y=AK^aL^1-a
- K/L are capital and labor which are inputs of production
- a - Alpha is a parameter that shows the importance of K compared to L e.g if alpha=1 it shows the firm only values Capital and not labor.
- A is a measure of productivity often referred to as technology
What are the 3 properties of the Cobb Douglas production function?
- F(K,L) is increasing in both outputs, this means as you add inputs capital and labor the production function increases.
- Decreasing marginal products - As you add more K,L the rate of the increase in production falls.
- Constant returns to scale - If we increase the amount of K,L by a quantity X, then output will increase proportionality by X assuming X is greater than 0.
What can output per person be written as?
Under constant returns to scale if we divide output by the number of workers we get Y/L = F(K/L,1) which we can then rewrite as: y=f(k), where lowercase workers denote per worker quantities and Y=K/L and k=K/L
What can output per person be written as in Cobb Dogulas be written as?
y=Ak^a
Up to what point do firms demand inputs of capital and labor?
Firms demand two inputs up to the point where their marginal products are equal to their marginal costs for Capital this will be to when MPK (Marginal product of K)=r(Marginal cost of K which is the rent of the equipment), and for Labor when MPL=W(Wage rate)
What do the supply of capital and demand of capital and labor curves look like?
- Supply of capital and labor curves are horizontal as they are fixed and exogenous
- Demand of capital and labor curves are downwards sloping as the lower the interest and wage rate the greater the demand for capital and labor.
Define equilibrium and general equilibrium?
- Equilibrium - Value of all endogenous quantities and prices such that markets clear
- General Equilibrium - This is when we have more than one market which are related.
