chap 12

Question 1

facts of income and growth

Answer 1

fact 1: there are vast differences in living standards around the world
fact 2: there’s great variation in growth rates across countries

Question 2

productivity

Answer 2

the average quantity of g&s produced per unit of labor input. the ability to produce g&s depends on this

Question 3

productivity =

Answer 3

Y/L (output per worker)
Y = GDP
L = quantity of labor

Question 4

why is productivity so important

Answer 4

more productive, real GDP is large and incomes are high

high productivity means high standard of living

Question 5

physical capital per worker

Answer 5

K/L where K = physical capital

bigger K/L, bigger Y/L

Question 6

human capital (H)

Answer 6

the knowledge and skills works acquire through education, training and experience

Question 7

physical capital (K)

Answer 7

the stock of equipment and structures used to produce g&s

Question 8

human capital per worker

Answer 8

H/L

bigger H/L, bigger Y/L

Question 9

natural resources (N)

Answer 9

the inputs into production that nature provides (land, minerals, etc)

Question 10

natural resources per worker

Answer 10

N/L

bigger N/L, bigger Y/L

Question 11

technological knowledge (A)

Answer 11

society’s understanding of the best ways to produce g&s

any advance in knowledge that boost productivity

Question 12

tech knowledge vs. human capital

Answer 12

tech = the understanding of how to produce
H = results from the effort people expend to acquire knowledge

Question 13

the production function Y = (equation)

Answer 13

Y = A f(L, K, H, N)

Question 14

production function has constant returns to scale, which is:

Answer 14

changing all inputs by the same percentage causes output to change by that percentage

Question 15

the equation that shows what productivity (Y/L) depends on

Answer 15

Y = A f(1, K/L, H/L, N/L)

Question 16

when consuming less, what happens to productivity

Answer 16

it goes up, increases more capital, increasing saving

Question 17

diminishing returns to capital

Answer 17

as K rises, the extra output from addition unit of K falls, the graph is a curve that is like a horizontal parabola

Question 18

catch up effect

Answer 18

economies that are in worse shape can increase K a lot faster than economies that are better off
there’s less room to improve the higher you are
poor countries tend to grow more rapidly than rich ones

Question 19

investment from abroad

Answer 19

gov’t can encourage foreign investment

Question 20

foreign direct investment

Answer 20

a capital investment (a factory, etc) that is owned and operate by a foreign entity

Question 21

foreign portfolio investment

Answer 21

a capital investment financed with foreign money but operated by domestic residents

Question 22

increasing K requires investment but boosts

Answer 22

productivity

Question 23

promoting education increases

Answer 23

human capital, and therefore productivity

Question 24

how does the government promote education?

Answer 24

public schools, loans/grants for college

Question 25

trade off increasing H?

Answer 25

a year in school sacrifices a year of wages but gives high wages later

Question 26

gov't provided health care

Answer 26

healthier workers are more productive

Question 27

property rights

Answer 27

the ability of people to exercise authority over the resources they own

Question 28

political instability creates

Answer 28

uncertainty over whether property rights will be protected in the future

Question 29

when people fear their capital may be stolen or taken by criminals/gov't there is less

Answer 29

investment, the economy is less efficient, lower living standards

Question 30

inward oriented policies

Answer 30

aim to raise living standards by avoiding interaction with other countries ex. tariffs, limits on investments from abroad

Question 31

outward-oriented policies

Answer 31

promote integration with the world economy | ex. the elimination of restrictions on trade or foreign investment

Question 32

how does free trade effect productivity

Answer 32

can help discover new technologies and improves productivity

Question 33

knowledge is a public good:

Answer 33

ideas can be shared freely, increases productivity

Question 34

policies that promote tech progress

Answer 34

patent laws, tax incentives, grants, etc

Question 35

how does population grow affect living standards

Answer 35

stretching natural resources, diluting the capital stock, promoting tech progress,

Question 36

bigger population has higher L, how does it effect productivity?

Answer 36

lowers productivity and living standards | also lowers education