economic growth

Question 1

what changed economic growth rate in the past?

Answer 1

• agricultural advances resulted in more food and less hunger
• fewer people needed to work on farms
• the industrial revolution sparked tremendous economic growth

Question 2

what does economic growth ultimately lead to?

Answer 2

higher standards of living and longer lives

Question 3

what is the production function?

Answer 3

describes the methods by which inputs are transformed into outputs

input -> output (GDP)

technology is constant in the function

Question 4

how do businesses transform inputs to outputs?

Answer 4

the production function describes the management techniques your company uses to transform inputs into outputs

better labour/ technology

Question 5

what is the aggregate production function?

Answer 5

relates total output (GDP) to the quantity of inputs imployed

Question 6

what is human capital?

Answer 6

skills that workers bring to a job

Question 7

what is physical capital?

Answer 7

tools, machinery, and structures

Question 8

what is the mathematical representation of the aggregate production function?

Answer 8

Y = f(L, H, K)

where
Y = output
L = labour
H = human capital
K = physical capital

Question 9

what does the aggregate production function tell us about economic growth?

Answer 9

a country will production more output if
1. it employs more workers (more labour)
2. its workers become more highly skilled (increase human capital)
3. accumulates more physical capital
4. better/ more technology

Question 10

how does labour and total hours worked affect economic growth?

Answer 10

labour input is measured as the total number of hours worked across the economy

the more labour that workers do, the more output gets produced

population boosts total GDP, but not GDP per person

Question 11

what demographic factor can inhibit economic growth?

Answer 11

• the dependency ratio

Question 12

what is the dependency ratio?

Answer 12

the number of people too young or too old to work per 100 people of working age

Question 13

how does human capital affect economic growth?

Answer 13

output reflects the quantity of hours worked and the productivity of people at work

labour productivity partly depends on human capital

Question 14

what is labour productivity?

Answer 14

the quantity of goods and services that each person producers per hour of work

Question 15

how does capital accumulation affect economic growth?

Answer 15

the equipment you work with also determines how much you produce per hour

you are more productive when you have the right equipment

Question 16

what is capital stock?

Answer 16

the total quantity of physical capital used in the production of goods and services

Question 17

what are the characteristics of capital?

Answer 17

• physical capital is a complement to labour
• investment depends on the savings rate
• foreign investment builds the capital stock

Question 18

how does technological progress affect economic growth?

Answer 18

makes it possible to produce more from given resources

is embodied by computers

Question 19

what are the insights that the production function gives into the process of economic growth?

Answer 19

1) constant returns to scale
2) diminishing returns to capital
3) poor countries can enjoy catch-up growth

Question 20

what does constant returns to scale mean?

Answer 20

refers to the situation when all inputs are increased by some proportion and output increases by the same proportion

Question 21

what is the replication argument?

Answer 21

states that to double output in your business you can replicate everything you are already doing

Question 22

what is the law of diminishing returns?

Answer 22

when one input is held constant, increases in the other inputs will, at some point, begin to yield smaller and smaller increases in output

Question 23

what does diminishing return imply for poor countries?

Answer 23

implies poor countries can catch-up to wealthier ones

investment in capital will have a large return for a relatively poor country

Question 24

what is the solow model?

Answer 24

the capital stock will grow as long as investment outpaces depreciation

capital per worker (K/L) will eventually stop growing

capital accumulation can’t sustain long-term growth

Question 25

where does technological progress come from?

Answer 25

driven by how quickly new ideas are created and how many resources are devoted to generating new ideas

Question 26

why can idea-driven economic growth be sustained?

Answer 26

1. ideas can be shared freely
2. ideas do not depreciate with use
3. ideas may promote other ideas

Question 27

what is the role of incentives?

Answer 27

institutions can provide incentives for people to invent new ideas and invest in human or physical capital

Question 28

what are some examples of incentives?

Answer 28

• property rights
• government stability
• efficiency of regulation
• policy to encourage innovation

Question 29

what are property rights? how do they promote economic growth?

Answer 29

property rights grant control over a tangible or intangible resource

without property rights, there is no incentive to create wealth

Question 30

how does government stability promote economic growth?

Answer 30

a stable government makes economic growth more likely

corruption and political instability discourage investment and innovation

Question 31

how does efficient regulation promote economic growth?

Answer 31

bureaucratic obstacles, including excessive regulatory oversight, can hinder economic growth