03 - Economic Growth

Question 1

Economic Growth measure how much… and is a …. for poverty reduction

Answer 1

real GDP (per capita) grows over time

a powerful tool

Question 2

What is the key to sustained economic growth?

Answer 2

• technological progress

Question 3

GDP per capita is ….. correlated with poverty

Answer 3

negatively

Question 4

A steady economic growth rate…

1.
2.

Answer 4

1. can be the key to large income per capita figures
2. leads to exponential growth in GDP

Question 5

Exponential Growth Definition

Answer 5

• a process by which quantity, like GDP per capita (Y), grows at a constant porportion or growth rate (g): Yt = Y baseline x (1+g)^t

Question 6

With exponential growth, rather small differences in growth rates lead to…

Answer 6

… large differences in quantity over time

Question 7

What is sustained growth?

Answer 7

• countries experiencing positive and relatively steady growth rates over 50-, 100- and even 200-year periods (e.g. UK, USA, France)

Question 8

What is catch up growth?

Answer 8

• some poor countries that tend to grow fast or “catch up” to rich countries, as they adopt technologies of the richer countries (Spain, South Korea, China)

Question 9

What is the Solow Model? What are its three building blocks?

Answer 9

most commonly used economic model to analyze growth:

• Aggregate production funtion Y = A*F (K,H)
• physical capital accumulation equation
• saving rate of households

Question 10

What is a steady state equilibrium in the solow growth model?

Answer 10

• an economic equilibrium where the physical capital stock remains constant over time

Question 11

Analyzing the Equilibrium | What happens if K changes?

Answer 11

• if K (physical capital stock) changes, for example due to a war, the economy will over time return to the old equilibrium (K, Y), e.g. via catch up growth

Question 12

Analyzing the Equilibrium | What happens to H if the level of efficiency units increase?

Answer 12

• labor H will lead to upwards shift of the savings curve and thus lead to a higher GDP Y**

Question 13

What happens to the entire savings curve in case of technological progress?

Answer 13

• (technological progress is increase in A) its the source of sustained growth and shifts up the entire savings curve

Question 14

What are the proximate causes of growth?

1.
2.
3.

Answer 14

• increasing the stock of physical capital (K)
• increasing the total efficiency units of labor (H)
• improving the technology (A)

Question 15

Proximate Causes of Growth | Increasing Physical Capital

1. How can K be increased?
2. What does S determine?

However, even if investment in physical capital is helpful for growth, we know from the solow model that…

Answer 15

1. to increase K one has to invest, (physical capital accumulation) i.e. save
2. level of S is determined by individual households´decisions on how much to consume versus to save (todays vs tomorrows happiness)

…. increases in K alone are not sufficient to generate sustained growth (K exhibits diminishing returns)

Question 16

Proximate Causes of Growth | Growing via increasing the total efficiency units of labor

What can help here? What to keep in mind?

1.
2.

Answer 16

• population growth and investment in human capital such as education can help to increase H (H = L * h)
• however, due to diminishing returns, increases in H alone are not sifficient to ensure sustained growh

Question 17

What are fundamental causes of growth?

GIC

1.
2.
3.

Answer 17

• the root reasons for differences in the proximate causes
• ultimate determinants of economic development (!)
• geography, culture, institutions

Question 18

Fundamental Causes of Growth | What is the geography hypothesis? Name examples

1.
2.
3.
4.
5.

Answer 18

• claims that differences in geography, climate and ecology are ultimately responsible for the large differences in prosperity observed around the globe
• impossibility of agricuöture
• high daytime temperatures
• lack of navigable rivers for transportation
• high prevelance of infectious diseases like malaria

Question 19

Fundamental Causes of Growth | What is the culture hypothesis?

1.
2.
3.
4.

Answer 19

• claims that different values and beliefs are responsible for large differences in prosperity observed around the globe
• religious beliefs (e.g. Max Weber said that protestand beliefs lead to greater work etc)
• family ties
• social norms

Question 20

Fundamental Causes of Growth | What is the Institutions hypothesis? What is the definition of institutions?

1.
2.
3.

Answer 20

• claims that differences in the way societies organize themselves via formal and informal rules are responsible for the large differences in prosperity observed around the globe
• institutions are humanly devised constraints that shape human interaction and determine incentives
• e.g. Adam smith and the institution market (the invisible hand) generates prosperity

Question 21

Why are inclusive economic institutions a fundamental cause of economic prosperity?

1.
2.

Answer 21

• support and encourage economic transactions, e.g. protect private property, uphold law and order, allow and enforce private contracts, allow free entry into new lines of business and occupations
• e.g. china developed the economy fast because of changes in economic institutions aka switching to private markets

Question 22

Lacking Economic Institutions and Entrepreneurs

1.
2.

Answer 22

• for each level of return how many entrepreneurs are able to generate that returns (the more entrepreneurs, the less)
• insecure property rights or the lack of legal backup for contracts can reduce returns (then equilibrium is at lower nr of entrepreneurs)

Question 23

Colonialism was driven by……

Where europeans encoutered….

1.
2.
3.

Answer 23

a profit motive

• relatively rich economies they did not set up inclusive economic institutions but instead exploited their resources and people
• not developed civilizations, they settled themselves (and established inclusive economic institutions)

Question 24

Does foreign aid as a pure money transfer help fighting poverty in the long run?

1.
2.
3.

Answer 24

• amounts often not large enough to lead sizeable increases in physical capital or educational attainment and do not impact technology or the efficiency of production
• only 10-15 per cent of aids reach destination
• root of poverty is lacking inclusive economic institutions -> aid will not fix this

Question 25

What are the two times of economic history?

Answer 25

• old times before 1800 where technological change was much slower and
• GDP growth did not translate into GDP per capita growth
• modern times

Question 26

What does the Malthusian Cycle state?

Answer 26

• fertility would adjust so that income per capita would always remain at the subsistence level (humankind destined to live at subsistence level)
• increase in income per capita above level -> higher fertility rates
• higher fertility rates -> downward pressure on income per capita (bc assumed that aggregate income could not grow fatser than population)
• thus income per capita falls below subsistence level -> famines or war will kill people, income per capita pushed up again

Question 27

What are the two developments that allowed breaking out of the malthusian cycle?

1.
2.

Answer 27

• industrial revolution: many innovations and implementation in production process (free entry business lines, new techs etc)
• demographic transition: decline in fertility that happens often when changing from agriculture to industry