Week 2: Economic Growth

Question 1

Economic Growth

Answer 1

Long-run improvements in living standard

Question 2

Operational Economic Growth

Answer 2

Long-run increases in GDP per capita

Question 3

Why is economic growth important?

Answer 3

Small changes in annual growth can have a large impact of the growth levels in the future

Question 4

What is the Rule of 70?

Answer 4

Practical approximate rule to understand the implications of economic growth

Question 5

The Rule of 70

Answer 5

If y grows at a rate of g then the numbers of years it takes y to double is approx equal to 70/g

Question 6

What do small differences in growth rates result in over time?

Answer 6

Large differences in growth over time

Question 7

What does the time it takes to double economic growth depend on?

Answer 7

the growth rate (not the initial value)

Question 8

Long-Run Economic Growth - Before Industrial Revolution

Answer 8

Little difference between countries and time - no sensible increase of living standards

Question 9

Long-Run Economic Growth - After Industrial Revolution

Answer 9

Per capita real income growth has been close to 2% per year since 1900 in most developed countries

Question 10

Long-Run Economic Growth between 1800 and 1950

Answer 10

Gap in per capita income extremely widens during this period and creates two groups - W Europe, US, Canada, Australia, NZ and rest of the world

Question 11

Correlation between Real Per Capita Income and Rate of Population Growth

Answer 11

Negative correlation

Question 12

Trend in hours worked over time in developed economies?

Answer 12

Increased

Question 13

Production Function (Definition)

Answer 13

Shows how much output (Y) can be produced given any number of inputs

Question 14

Production model

Answer 14

Single, closed economy

One consumption good

Question 15

Inputs in the production process

Answer 15

Labour: L
Capital: K

Question 16

Production Function (Equation)

Answer 16

Y = F(K,L) = AK^1/3L^2/3
Y = output 
F(K,L) = output 
A = productivity parameter 
K^1/3L^2/3 = inputs (capital and labour)

Question 17

3 ways that Y can change in the production function?

Answer 17

1. Capital changes (K)
2. Labour force changes (L)
3. Ability to produce goods with given resources (K.L) changes

Question 18

Cobb-Douglas Production Function (Equation)

Answer 18

Y = K^⍺L^1-⍺
⍺ is assumed to be 1/3
Function exhibits constant returns to scale

Question 19

Constant Returns to Scale

Answer 19

When an increase in inputs (capital and labour) cause the same proportional increase in output
If K and L increase by x% then Y also increases by x%

Question 20

Output per Worker Equation

Answer 20

Question 21

MaxProfits Equation for Allocating Resources

Answer 21

maxπ = F(K,L) - rK - wL 
π = profits 
r = rent of capital 
w = wage rate

Question 22

Marginal Product of Labour (MPL)

Answer 22

the change in output that results from employing an added unit of labour

Question 23

Marginal Product of Capital (MPK)

Answer 23

the change in output that results from employing an added unit of capital

Question 24

Allocating Resources Model: Up to what point do we hire capital and labour?

Answer 24

Hire capital until MPK = r

Hire capital until MPL = w

Question 25

What does the solution imply from the allocating resources model?

Answer 25

Firm employs all supplied capital and labour in economy

Question 26

What Does Equilibrium in Production Function Mean? (3 points)

Answer 26

All income is paid to capital or labour
Results in zero profit in the economy
Verifies the assumption of perfect competition

Question 27

If MPK is higher in poor countries with low K - why doesn’t capital flow to those countries?

Answer 27

A simple production model with no difference in productivity across countries is misguided

Question 28

Productivity Parameter

Answer 28

measures how efficiently countries are using factor inputs

Question 29

TFP – Total Factor Productivity

Answer 29

measure of productive efficiency in that it measures how much output can be produced from a certain numbers of inputs

Question 30

What do levels of TFP imply? (Lower Level and Higher Level)

Answer 30

Lower level - workers produce less output for any given level of capital per person
Higher level - workers produce more output for any given level of capital per person

Question 31

Annual Growth Rate in GDP per capita (Over period of 1+ years)

Answer 31

g = (GDP1/GDP2) ^1/n -1
n = number of years in period

Question 32

TFP Equation

Answer 32

Take cobb-douglas production function and solve for A

Question 33

How to use rule of 70 with growth rates?

Answer 33

Divide 70/g

where g = growth rate

Question 33

How to use rule of 70 with growth rates?

Answer 33

Divide 70/g

where g = growth rate

Question 34

What does it mean for a country if TFP is higher compared to another country?

Answer 34

MPL is also higher

In turn wages must be higher

Question 35

What happens when workers move from an area of lower TFP to an area of higher TFP? Why?

Answer 35

1. Labour input increases in the area with higher TFP and decreases in the area with lower TFP
2. Wages decrease in the area of higher TFP and increase in the area with lower TFP - due to changes in the marginal product of labour
3. Process stops when wages are equalised

Question 36

How to work out if a production function has increasing, decreasing or constant returns to scale?

Answer 36

Take function and substitute in an input and obtain result. Then double input and the change in output will confirm the returns to scale