Week 4 - Economic Growth Flashcards
Define economic growth
Economic growth refers to the growth in total (national) output.
What is per capita growth
Per capita growth is the growth in output divided by the population. This is not always distributed evenly in reality.
Why is the lack of growth a problem?
If there is no growth, stagnation occurs which can feel like a recession as people expect increasing output and income. The country falls relative to other countries.
What is happening in Japan?
Japan is suffering from stagnation, in relative terms, its under performance has lead to it falling behind other countries. Consumption has also stagnated which has lead to no growth in the economy. Countries like this tend towards inflation.
Difference between long and short run
In the short run, at least one variable is fixed while in the long run, all factors of production and costs are variable.
Explain the Great Divergence
Prior to the 1700s, growth in different countries was largely the same. Since the industrial revolution, there has been significant variation
Formula for through the year growth
Growth = new - old/ old
What is the effect of compounding?
Relatively low growth rates lead to big changes over time. This means that over long periods, you can’t use the growth rate and divide by the time.
Formula for finding compound growth rate
(ending value/starting value) ^ (1/time) -1
How is production treated in the Solow-Swan model?
Uses the production function, Y = AKL
How is the resource constraint treated in the Solow-Swan model?
An explicit constraint in put in place where output can either be used for consumption or investment
Income = consumption + investment
How is capital accumulation treated in the Solow-Swan model?
Capital accumulation has to consider deflation
Capital new = capital old + investment old - depreciation rate times capital old
How is labour treated in the Solow-Swan model?
Labour is considered an exogenous variable and is just L
How is investment treated in the Solow-Swan model?
Total investment is a constant
Income - consumption = investment where income - consumption is savings
Explain what drives what in the Solow-Swan model
capital stock and technology drive output per capita. Capital is driven, in part, by savings which drives investment
Explain Net-payoff
Real output per hour and capital per hour has diminishing returns. Technology determines the curve (which is the trade-off between the two)
Why are there diminishing returns?
Eventually, capital makes little change to productivity. For example, giving a worker a computer greatly increases productivity. Giving them a third one is less effective.
What are the 4 factors of productivity?
1) Human capital
2) Technology
3) Institutions
4) Shocks
Define human capital and 2 ways of improving it
Human capital is the stock of skills that individuals accumulate to make them more productive. Health and education can improve it.
What is included in technology?
Technology includes process innovation, inventions, intellectual property etc
What is an institution?
An institution refers to property rights, rule of law, government systems, organisational form, contract enforcement and policies.
5 examples of shocks
famine, was, plague, oil shocks, mining boom
What are three things that contribute to GDP growth
1) Participation
2) Population growth
3) Labour productivity (human and physical capital)
Define innovation
Refers to the implementation of a new or significantly improved product, process or practice. The OECD estimates is accounts for 50% of growth.
List 7 factors of living standards
1) material wealth
2) economic mobility
3) health
4) education
5) freedom
6) equality
7) safety from crime
What is quality of life
Broad term referring to how people feel about their life and their enjoyment from it.
Why does capacity utilisation matter?
Less capacity utilisation means lower growth as the slack is tying up resources that could be used elsewhere (entails an opportunity cost)
Link between capacity utilisation and the Great Depression
The huge increase in ownership of goods (such as cars and radios) meant the markets were reaching saturation and there was too much productive capacity for demand resulting in underutilisation
Link between capacity utilisation and the business cycle
The business cycle consists of alternations between slack periods (output capacity)
What are 3 reasons for why business cycles tend to be less severe now?
1) The switch between manufacturing and more flexible services
2) government policies such as transfer payments which act as automatic stabilisers
3) Financial sector stability (regulation)
Given the fact that there are diminishing returns from capital and labour, how can a country continue to grow infinitely?
Infinite increased in GDP can be acheived by increasing A as in the production function Output = Akl.
Unlike increases in K or L, which are movements along the curve, this pushes the curve out
Impact of slowing investment in China and relation to the GFC
Australia fared better than most economies during the GCF due to the stimulus package and increasing demand for Australian exports (mining boom)
Slowing investment in China is contributing to lower demand for these exports, reducing growth as Y = C + G + I + NX. It also leads to declines in I as there is less incentive to invest.
In order to offset these falls, we need to shirt towards more consumption based growth (retail, clean energy, financial services, education etc).
