Week 2

Question 1

when did significant economic growth begin?

Answer 1

began during the industrial revolution

:The application of mechanical power to the production of goods, beginning in Britain around the mid to late 1700s

Question 2

Why did the Industrial Revolution occur in Britain?

Answer 2

It has been argued that the institutional changes following the Glorious Revolution, such as protecting private property rights, was the key factor in encouraging entrepreneurship and growth

Question 3

Small differences in growth rates are important

what does the rule of 70 show?

Answer 3

§rule shows small differences in growth ompound over time.

§This leads to large differences in the number of years it takes for real GDP to double.
number of years to double = 70/growth rate

e.g. if you have 10% growth rate, it would take 7 years for it to double

Question 4

Why do growth rates matter?

Answer 4

§An economy that grows too slowly fails to raise living standards.
§People living in economies with low or no economic growth suffer from starvation and disease, and lack basic facilities, healthcare and education.

Question 5

Economies can be grouped into:

Answer 5

1. high income countries
2. developing countries
3. newly industrialised economies
4. emerging economies

Question 6

how is standard of living being improved in sub saharan africa and other countries

Answer 6

increases in technology and knowledge are leading to improvements in health care and the standard of living.

Question 7

A country’s standard of living is measured not only by income levels, but also in terms of

Answer 7

health, education, individual rights, political stability and similar factors (many of which are interrelated, including income)

Question 8

rule of 70 formula

Answer 8

‘rule of 70’ to calculate approximately how many years it would take for a country to double its real GDP by dividing 70 by the average annual economic growth rate.

Question 9

what determines how fast economies grow?

Answer 9

§Economic growth model: A model that explains changes in real GDP per capita in the long run.
§Labour productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.
§Technological change: The change in the ability of a firm to produce output with a given quantity of inputs.
§Human capital: The accumulated knowledge and skills workers acquire from education and training or from their life experiences.

Question 10

What determines how fast economies grow?

Technological change

There are three main sources of technological change

Answer 10

1. Better machinery and equipment.
2. Increases in human capital.
3. Better means of organising and managing production.

Question 11

The per-worker production function

Answer 11

§The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant.
Increases in capital per hour worked increase output per hour worked, but at a diminishing rate.

Each additional $10 000 increase in capital per hour worked results in progressively smaller increases in output per hours worked.

Question 12

Which is more important for economic growth: More capital or technological change?

Answer 12

§Technological change helps economies avoid diminishing returns to capital.

Question 13

Which is more important for economic growth: More capital or technological change?

technological change includes

Answer 13

–the replacement of existing capital with more productive capital.
–reorganising how production takes place.

Question 14

Technological change: The key to sustaining economic growth

Answer 14

§Technological change shifts the per-worker production function upwards.

. -a country will experience increases in its standard of living only if it experiences increases in real GDP per hour worked.
§In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change.

Question 15

describe this graph

Answer 15

Technological change shifts up the production function and allows more output per hour worked with the same amount of capital per hour worked.

For example, along Production function1 with $50 000 in capital per hour worked, the economy can produce $575 in real GDP per hour worked. However, an increase in technology that shifts the economy to Production function2 makes it possible to produce $675 in real GDP per hour worked with the same level of capital per hour worked.

Question 16

what explains the economic failure in the soviet union?

Answer 16

The Soviet Union was centrally planned, with no incentives for entrepreneurship. This meant that technological change was very slow.

In contrast to diminishing returns to capital, there may be increasing returns to technology.

Question 17

What determines how fast economies grow?

Answer 17

new growth theory

A model of long-run economic growth that emphasises that technological change is influenced by economic incentives, and so is determined by the working of the market system.
–Developed by economist Paul Romer.
§Romer argued that the accumulation of knowledge capital is a key determinant of economic growth.

Question 18

New growth theory

How can Government policy increase the accumulation of knowledge and capital

Answer 18

1. Protecting intellectual property rights with patents and copyrights.
2. Subsidising research and development.
3. Subsidising education.

Question 19

New growth theory

What is a patent

Answer 19

§: The exclusive right to a product for a period of time from the date the product was invented.

Question 20

new growth theory

what is copyright

Answer 20

§The legal right of the creator of a book, movie, piece of music or software to the exclusive right to use the creation during the creator’s lifetime, plus an additional period of time for their heirs.

Question 21

Joseph Schumpeter and creative destruction

Answer 21

§To Schumpeter, the entrepreneur is central to economic growth:

According to Schumpeter, the key to rising living standards is not small changes to existing products but, rather, products that meet consumer wants in qualitatively better ways

The profits an entrepreneur hopes to earn provide the incentive for bringing together the factors of production—labour, capital and natural resources—to start new firms and introduce new goods and services.

Question 22

Theories of economic growth can help understand Australia’s record of economic growth

Answer 22

§Prior to colonisation: Small, subsistence Aboriginal population.
§Colonisation (1788) to early 1800s: Small-scale farming.
§1861 – 1891: Rapid economic growth.
1890s – 1940: Droughts in the late 1890s, negative growth during WWI and the Great Depression

Question 23

Economic growth and labour productivity in Australia since 1940

Answer 23

§1940s – mid-1970s: Increases in labour productivity and economic growth rates.
§Mid-1970s – 1990: Lower economic growth rates; relatively low growth rates in productivity.
§1991-2005: Mainly continual strong economic growth; strong productivity growth rates.
§2006 – 2012: Falls in productivity growth rates (negative for some industries); slower economic growth after 2007.

Question 24

Economic growth and labour productivity growth between the late 1940s and early 1970s averaged

Answer 24

4.6 per cent and 2.3 per cent

Question 25

for almost 20 years, from 1973 to 1991, labour productivity growth rates in Australia

Answer 25

Australia fell substantially, closely mirroring the experiences of other developed countries.

Question 26

Economic growth and labour productivity growth in Australia began to commence another long period of growth from the

Answer 26

early 1990s following a period of significant structural reforms and market deregulation in the economy, and increased technological change.

Question 27

. From the mid-2000s to 2012, a significant productivity growth slow‑down occurred

Answer 27

a significant productivity growth slow‑down occurred.

Question 28

What caused the productivity slowdown of the 1970s and 1980s?

Answer 28

§High oil prices? A popular idea, but the productivity slowdown continued after firms had adjusted to high oil prices, and after oil prices fell.
§Regulated markets? Economists believe that regulation stifled competition, innovation and market flexibility, reducing productivity growth rates.

Question 29

What caused the productivity slowdown of the 1970s and 1980s? cont.

Describe how trade protection caused the slowdown

Answer 29

Shielding domestic markets from imports and international competition reduced domestic innovation and efficiency, leading to higher costs, higher prices and slower productivity growth rates.

Question 30

Can Australia maintain high rates of productivity growth?

Answer 30

§Information technology is believed to have increased productivity from 1990 to 2005.
Debate is occurring about whether information technology can continue to make significant contributions to productivity growth

Question 31

what is multifactor productivity

Answer 31

§: The quantity of goods and services produced per combined input of labour and capital.

Question 32

from 2006 to 2012 productivity growth rates fell, and at times became negative

how come?

Answer 32

–This can happen during a boom period for a time, as resources are fixed and diminishing returns occur as output rises.

Question 33

from 2006 to 2012 productivity growth rates fell, and at times became negative

how come?

what has this led to calls by economists?

Answer 33

led to calls by economists for renewed investment in infrastructure and further industrial reforms

Question 34

Are the developing countries catching up to the industrialised countries?

Answer 34

§The prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.
§Some poorer countries have experienced rapid growth rates, but some have not.

Question 35

Why don’t more low-income countries experience rapid growth?

What are five factors

Answer 35

§There is no one answer to the question as to why all countries do not experience economic growth.
§Most economists identify five key factors:
1.Failure to enforce the rule of law.
2.Wars and revolutions.
3.Poor public education and health.
4.Slow technological development.
5.Low rates of saving and investment.

Question 36

how does failure to enforce the rule of law influence growth rates

Answer 36

§Property rights: The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.
§Rule of law: The ability of a government to enforce the laws of a country, particularly with respect to protecting private property and enforcing contracts.

Question 37

: The rule of law and growth.

The 20 developing countries that have the strongest rule of law grew

Answer 37

grew more than six times faster during the 1990s than the 20 developing countries that have the weakest rule of law.

Question 38

how does war and revolution influence the difference in growth rates?

Answer 38

§Many countries that were poor in 1960 have experienced extended periods of violent changes of government during the years since.

§Some examples include Afghanistan, Angola, Ethiopia, the Central African Republic and the Congo.

Question 39

how does poor education and health cause differences in growth rates

Answer 39

§Many low-income countries have weak public school systems, so many workers are unable to read and write.
§People who are sick work less, and are less productive when they do work.

Question 40

how does low rates of saving in developing countries cause differences in growth rates

Answer 40

§The low savings rates in developing countries contribute to a vicious cycle of poverty.

Question 41

what are the benefits of globalisation

foreign investments can help developing countries break out of the vicious cycle of low saving and investment and low economic growth

what is foreign direct investment

Answer 41

The ownership of, or controlling interest in, assets such as factories, businesses or farms in a foreign country

Question 42

what are the benefits of globalisation

foreign investments can help developing countries break out of the vicious cycle of low saving and investment and low economic growth

what is Foreign portfolio investment:

Answer 42

more speculative in nature

§The purchase by an individual or firm of financial securities, such as shares or bonds, issued in another country.

Question 43

what are the benefits of globalisation

foreign investments can help developing countries break out of the vicious cycle of low saving and investment and low economic growth

what is globalistion

Answer 43

§The interaction and integration between businesses, governments and people of different countries as they become open to foreign investment and international trade.

Question 44

Developing countries that were more open to foreign trade and investmen

Answer 44

grew much faster during the 1990s than developing countries that were less open.

Question 45

the ‘catch-up’ theory

Answer 45

the prediction that the level of GDP per capita in poor countries will grow faster than in rich countries.

Question 46

Is economic growth good or bad?

Answer 46

§It is undeniable that economic growth has reduced poverty and increased health, education and many other measures of welfare.

Question 47

§Criticisms of economic growth include:

Answer 47

–Globalisation undermines distinctive cultures.
–Multinational firms exploit low wages and poor health, safety and environmental regulations in the developing world.
–Economic growth contributes to global warming, deforestation and other environmental problems.

Question 48

The search for economic growth that is sustainable has

Answer 48

§come to the forefront of economic policy in high-income countries, and also in rapidly developing countries, such as China and India.

Question 49

what is the nominal GDP?

If GDP deflator is 150

i) inflation rate since base year
ii) real GDP

C) Nominal wages rise by 20%, what about real wages?

Answer 49

Nominal GDP = 6000

Inflation rate since base year = Prices have increased 50% since base year

Real GDP= given that prices have increased 50%, Deflator = Nominal GDP/ Real GDP x 100

150= 6000/R x 1000

R= 4000

C) real wages fell. This is b/c wages go up 20%, prices go up 50%. These workers are receiving -30% change in their real wage

Question 50

Answer 50

CPI = market basket in the year you’re looking for/ market basket in base year x 100

Question 51

What is the GDP deflator

Answer 51

broad measure of price levels in the economy

index # shows how much prices have changed since base yr

GDP deflator = nominal GDP/ real GDP x 100

Question 52

that accumulation of physical capital is subject to

Answer 52

diminishing returns: increases in capital per hour worked lead to increases in real GDP per hour worked, but at a decreasing rate.