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ECON 102 > week 16 > Flashcards

week 16 Flashcards

1
Q

how have living standards improved

A

variety, quality and quantity of goods and services increased during the 19th and 20th century, as reflected in real GDP
but comparing economic output over 100 years cannot account for new goods/services

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2
Q

what are living standards

A

real GDP per person is a measure of goods available to a typical person

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3
Q

what are the benefits of growth

A

pace of technical change is growing
inventions are not sufficient to sustain growth so goods must be sold

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4
Q

what is compound interest

A

pays interest on the original deposit and all previously accumulated interest
small growth in GDP can have a large effect over a long period

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5
Q

how do you find real GDP per person

A

(real GDP/number of employed workers) x (number of employed workers/population)

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6
Q

what does real output depend on

A

how much each worker can produce
the percentage of the population that is working

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7
Q

what determines a country’s economic growth rate

A

increases in output per person arise primarily from increases in average labour productivity

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8
Q

when does GDP per capita increase

A

when output per worker increases or share of population employed increases

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9
Q

what causes growth

A

in the long run
increases in output per person and living standards arise from increases in average labour productivity

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10
Q

what factors determine average labour productivity

A

human capital
physical capital
land and natural resources
technology
entrepreneurship and management
political and legal environment

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11
Q

what is human capital

A

talents, education, training and skills of workers
increases productivity and innovation
causes higher output and economic prosperity

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12
Q

what is physical capital

A

more and better capital (machinery, equipment, buildings etc) increases worker productivity and raises quality

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13
Q

what are diminishing returns to capital

A

the amount of labour and other inputs is constant then the greater the amount of capital already in use, less additional unit of capital adds
assumes all inputs except capital are held constant
causes output to increase at a decreasing rate

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14
Q

what are the implications of diminishing returns

A

increasing capital will increase output and labour productivity
positive contribution to growth

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15
Q

how does land and other natural resources improve labour productivity

A

increase worker productivity, creates jobs and generate revenue
land - used for farming and agriculture, produce food and raw materials for export, major contributor to some economies
extraction of natural resources - provides jobs and income, drives innovation
tourism - provides revenue
renewable energy - can be produced from land and natural resources

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16
Q

how does technology improve labour productivity

A

new tech is the most important improvement of productivity
improves efficiency and innovation at lower costs

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17
Q

what is the productivity puzzle

A

cause of slow down of growth is unknown, unclear if this is temporary or not
recent growth mainly linked to tech making workers more productive

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18
Q

how does entrepreneurship and management increase productivity

A

entrepreneurs create new economic enterprises and identify business opportunities
needed for a dynamic, healthy growing economy
take risks and create new products or services
create jobs and increase productivity
increase competition

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19
Q

how does political and legal environment increase productivity

A

encourage people to be economically productive
political stability attracts investment and promotes growth
having a fair and predictable legal environment also supports economic growth

20
Q

why is capitalism successful

A

provides incentive for individuals to create new products to make profit
allows resources to be allocated efficiently
encourages investment in human and physical capital, furthering growth
gives consumers choice of a wide range of products
contributes to economic growth

21
Q

why does communism fail

A

advocates for a classless society in which all property and resources are collectively owned
struggle to produce enough goods to meet needs of people
centralised planning causes inefficiency and lack of innovation
also causes political instability due to lack of freedom

22
Q

what is the solow growth model

A

shows relationship between quantities of inputs used in production and economy’s total output (Y)
2 inputs - physical capital K and labour N

23
Q

what is physical capital

A

consists of machines and buildings used in production of economy’s GDP

24
Q

what is labour

A

number of workers used in production of goods and services

25
Q

what is the production function

A

Y = F(K,N)
output is a function of the quantities of capital and labour used in the production process

26
Q

what are constant returns to scale

A

if labour and capital inputs are both increased by equal proportions, total output increases by the same proportion
CRS function: zY = F(zK, zN), where z is any positive number

27
Q

what is marginal product of capital (MPK)

A

assumed to be decreasing
MPK = change in Y / change in K

28
Q

what is the production function

A

shows how average labour productivity increases with capital per worker
for constant labour force the slope measures MPK

29
Q

what is the solow growth model

A

assumes that investment is financed by saving
saving is a constant fraction of income Y
I - investment
S - saving
s - saving rate
I = S = sY - in per capita terms
i = s*f(k) after dividing by N

30
Q

how much investment is needed to keep capital-labour ratio constant

A

depends on depreciation rate and population growth

31
Q

how does depreciation affect solow growth

A

part of capital stock that wears out and becomes les productive
if capital depreciates at rate d, investment must be dk to keep capital from falling

32
Q

how does labour force affect solow growth

A

labour force grows at rate n per period
economy needs an investment of nk to keep capital-labour ratio constant
investment per head needs to be (d+n)k to maintain constant capital-labour ratio

33
Q

how does increasing saving rate affect solow growth

A

shifts investment curve upwards, leading to higher investment
equilibrium capital-labour ratio increases from k1 to k2, productivity increases from y1 to y2
labour productivity increases and growth of output Y exceeds population growth n

34
Q

how does solow growth model explain economic growth

A

average labour productivity depends on the amount of physical capital per head in the workforce
the economy’s steady state growth rate should equal rate of population growth in the long run

35
Q

how does increasing labour productivity cause greater technical progress

A

improvement in knowledge enables higher output from existing resources
y = Af(k) where A is technical progress
if technology improves by g percent per year then A = (1+g)

36
Q

how does technology effect the solow model

A

technical progress causes an increase in overall productivity
more output can be produced with the same inputs
marginal product of capital increases, higher rates of investment and capital accumulation
causes higher living standards and economic growth

37
Q

what is total factor productivity

A

entrepreneurship - introduce new production methods and create economic enterprises
political and legal environment - establish property rights and effect investment

38
Q

how does human capital affect the solow model

A

higher human capital causes living standards to be higher, even if capital-labour ratio is the same

39
Q

how did covid affect growth

A

period of low investment
closing schools reduces human capital
unemployment and health issues could reduce working population

40
Q

how does democracy affect growth

A

associated with higher human capital, higher economic freedom and less political instability
tied to growth sources like education and healthcare

41
Q

what are the costs of economic growth

A

increasing capital stock, increases GDP in the long run
opportunity cost of producing capital goods : fewer consumed goods, less leisure, health risks, cost of R&D, cost of education

42
Q

how does human capital promote growth

A

govs support training and education
govs pay as education has externalities: democracy works better, more taxes, increased technical innovation, poorer families cannot pay

43
Q

how do savings/investment promote growth

A

govs encourage capital formation and saving
govs can invest directly in capital formation eg infrastructure

44
Q

how does R&D promote growth

A

promotes innovation
gov sponsors military and space applications
maintain political and legal framework to support growth

45
Q

how do you promote economic growth in less developed areas

A

more human and physical capital is needed
need institutions to support growth
corruption does not encourage investment
regulation discourages entrepenuership
taxes discourage risk taking
markets don’t function efficiently
lack of political stability

46
Q

what are the limits to growth

A

depletion of natural resources - more efficient techniques to use and extract them, limit is environmental damage

ECON 102 (26 decks)

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