Economic Growth Flashcards
(25 cards)
What is the long-run average rate of growth in real GDP? Real GDP per capita?
- Real GDP per year 3%
* Reap GDP per capita 2%
How does long-run U.S. growth generally compare with Europe? Asia? Africa?
• Faster the Europe and Africa, slower than Asia
What is productivity? Why does it matter to economic growth?
• Productivity
(an economic measure of output per unit of input)
o Input includes labor and capital
o Output measured in revenues and other GDP components
o Output per worker (Y/L)
o (Output/worker)labor force (Y=Y/LL)
• Economic growth
o Productivity allows economy to accomplish more with less
• Capital and labor are both scarce resources so maximizing their impact is always a core concern of mod. Business
What is the role of technology in economic growth?
• Technology
o Innovation and invention
• Important to economic growth
• New ways of doing things are important
Whats is the role in economic growth: Political Structure and property rights
o Interplay of economic and political freedom
o Stake in system results in work harder
Whats is the role in economic growth: Human Capital
o Determinant in labor productivity, results in growth
Whats is the role in economic growth: Capital
o Investment in capital increases productivity
Whats is the role in economic growth: Savings
o Higher saving higher steady state Y/L (output per worker)
Whats is the role in economic growth: Education
o Increases human capital which increases productivity
Whats is the role in economic growth: Natural Resources
o Part of the production function
• Production function
(defines marginal product and to distinguish allocative efficiency)
• Y=Af
Whats is the role in economic growth: Industrial Policy
o Government planning
• Does not increase LR growth
Whats is the role in economic growth: Population growth
o Might cause economic growth
• Malthus’ Law
Population grow geometrically, food arithmetically
Whats is the role in economic growth: Research and Development
o Important to economic growth
o Knowledge public good
o Internalize externalize with patents
Whats is the role in economic growth: Taxes
o Less likely better
o Perhaps consumption tax
Whats is the role in economic growth: Free trade
o Encouraged
o Comparative advantage
Whats is the role in economic growth: Trickle down economics
o Pro-business/ pro-rich policies will eventually benefit the non-rich
o Helps the rich crumbs down to the rest
Whats is the role in economic growth: Government budget deficits
o Reduced gov spending and deficits to reduce crowing out which result in encouraging of saving, investment, and innovation
o Crowding out is when gov must finance its spending with taxes and/or with deficit spending leaving business with less money and effectively ’crowding them out’
How do you calculate growth rates?
• Rule of 72
o #years to double =72/ growth rate
o growth rate= 72/#years to double
What is the rule of 72? (Or 70)? How do you use it?
• 72/ growth rate= # years to double
o 10% -> 72/10=7.2
o Doubles in 4 years -> 72/x=4 x=18% per year
How does an increase in saving affect the economy in the long-run? Short run?
• Long-run
o Capital accumulation
o Consumption tax, IRA’s
• Short-run
Explain the idea of Classical/Malthusian theory of economic growth?
o Limited resources(land) leads to diminishing returns and ultimately decline in per capita wages to subsistence levels
Explain the idea of Neo-Classical – Slow Model theory of economic growth?
o Economy grows until in the long-run it hits a steady state with no growth in per capita GDP/ income unless tech change(unexplained by model-outside of it)
Explain the idea of Endogenous or New Growth Theory theory of economic growth?
o Explains determinants of technological change and thus growth
Explain the idea of Creative Destruction theory of economic growth?
o Revolutionizes the economic structure from within, incessantly destroying the old one which can cause progress and improve standards of living
