Ch. 10- Economic Growth

Question 1

How is economic growth measured?

Answer 1

Real GDP per capita

Question 2

Rule of 70

Answer 2

Estimates the length of time for an economy to double itself.

Periods to Double = 70/Growth Rate per Period

Question 3

Compounding

Answer 3

Economic growth that builds on itself over time.

Question 4

(True/False): Economic growth is relatively new in the context of history

Answer 4

True

Question 5

Compounding of Interest

Answer 5

The idea that earlier interest payments get added to the account and earning interest in turn.

Makes a seemingly low growth rate (ex. 2%) more impressive!

Question 6

How is productivity measured?

Answer 6

Output per worker (Y/L)

Question 7

What explains the diversity in economic growth around the world?

Answer 7

> Increases in inputs
Increases in input utilization
Increase in productivity*

Question 8

Economic Growth

Answer 8

Increase in the production of goods and services over a specific period of time.

Question 9

What are the components of productivity?

Answer 9

> Physical Capital (K)
Human Capital (L)
Natural Resources (N)
Technology (A)

Question 10

Physical Capital (K)

Answer 10

Equipment and structures for the production of goods and services

Question 11

Human Capital (L)

Answer 11

Skills, knowledge, experience, and talent that determine productivity.

Question 12

Natural Resources (N)

Answer 12

Inputs that come from nature

2 types:
Renewable resources- replenish naturally over time (ex. Water for a hydroelectric plant)
Non-renewable resources- finite and do not replenish (ex. Coal)

Question 13

Technology (A)

Answer 13

Improvements in the field mean the same inputs will produce increased outputs.

Question 14

Level of Savings

Answer 14

Determines how much a firm can invest.

Question 15

Level of Income

Answer 15

The current amount of income a country possesses

Question 16

Rate of Income

Answer 16

The change in the amount of income a country possesses

Question 17

Growth Accounting

Answer 17

The relationship between the growth rate of inputs and the resulting growth rate of outputs. Can be used to calculate the growth rate of technology (harder to determine than other components)

Represented by Equation 10-4

Question 18

Decreasing Marginal Returns to Factors of Production

Answer 18

Countries that start with very little physical capital will get a higher return from adding a unit of capital than a country that starts at a higher initial level.

Question 19

Convergence Theory (catch-up effect)

Answer 19

Poor countries will grow faster than rich countries until they “catch up” and all countries “converge” at the same growth rate.

Question 20

Investment Trade-off

Answer 20

Reduction in current consumption to pay for the investment in physical capital intended to increase future production/consumption.

Question 21

Domestic Savings

Answer 21

Savings that come from within a country. If domestic saving < domestic investment, the difference is foreign investment.

Domestic Savings = Domestic Income - Consumption Spending.

Question 22

Foreign Direct Investment (FDI)

Answer 22

An investment that is financed with foreign money but operated by domestic residents.