Chapter 6 - Theories

Question 1

What is Classical Growth Theory?

Answer 1

The view that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level

Question 2

What is Neoclassical Growth Theory?

Answer 2

Real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labour grow

Question 3

When does growth end in Neoclassical Growth Theory?

Answer 3

If technological change stops because of diminishing marginal returns to both labour and capital

Question 4

Where does technological change come from in Neoclassical Growth Theory?

Answer 4

Chance

Question 5

Does economic growth effect the pace of change in Neoclassical Growth Theory?

Answer 5

No

Question 6

What are the Steps to Neoclassical Growth Theory?

Answer 6

Technological advances increase rapidly
Investment and saving increase
Real GDP per person increases
Diminishing returns to capital lower interest rate
Economic growth slows

Question 7

What is New Growth Theory?

Answer 7

Real GDP per person grows because of choices that people make in the pursuit of profit and that growth can persist indefinitely

Question 8

Where do discoveries come from?
What do discoveries bring?

Answer 8

Choices
Profit, and competition destroys profit

Question 9

What are discoveries?

Answer 9

A public capital good

Question 10

Is knowledge subject to diminishing returns?

Answer 10

No

Question 11

What are policies for achieving faster growth

Answer 11

1. Stimulate saving
2. Stimulate research and development
3. Improve the quality of education
4. Provide international aid to developing nations
5. Encourage international trade

Question 12

How does stimulating savings achieve faster growth?

Answer 12

Saving ↑ - Investment ↑ - Physical Capital ↑
Can be achieved by tax incentives

Question 13

How does stimulating R&D achieve faster growth?

Answer 13

Basic R&D is a public good
Not all benefit goes to discoverer
Too few resources are allocated
Can be achieved by increasing subsidies

Question 14

How does improving the quality of education achieve faster growth?

Answer 14

Benefits from education spread beyond the person being educated, so there is a tendency to under-invest in education

Question 15

How does providing foreign aid to developing countries achieve faster growth?

Answer 15

Increasing investment expenditure instead of giving money increases capital

Question 16

How does encouraging international trade achieve faster growth?

Answer 16

Extracts available gains from specialization and trade
Fastest growing nations are the ones with fastest growing imports and exports