Exam #3 Review Flashcards
(103 cards)
When did the concept of economic growth start?
Industrial Revolution, 1750 in England
why did the Industrial Revolution begin in England?
- it occured there because people had property rights over what they produced
- they had the ability and incentive to produce more and more and more
Economic Growth Model
a model that explians the growth rates in real GDP per capita over the long run
labor productivity
the quantity of goods and servies that can be produced by one worker or by one hour of work
what does the Economic Growth Model focus on in explaining changes in real GDP per capita?
Technological change
technological change
a change in the quantity of output a firm can produced using a given quantity of inputs
what are the three main sources of technological change?
- better machinery and equipment
- increases in human capital
- better means of organizing and managing production
human capital
the accumulated knowledge and skills that workers acquire from education and training or from their life experiences
Diminishing Marginal Productivity
adding more of 1 input to a fixed amount of another input will increase your output but by smaller and smaller increments
Thomas Malthus
- came up with “The Dismal Science”
- predicted people would starve to death because the earth is a fixed input and population keeps growing
- -however, he did not account for technology changes
Standard Growth Theory
- Says CAPITAL was the key to long term economic growth
- Robert Solow of MIT came up with this
New Growth Theory
- says that technological change, not strictly capital, is the key to growth
- Paul Romer
- technological change is influenced by economic incentives
4 barriers to long-run economic growth
- Corruption
- failure to enforce laws, including property rights - political instability
- environment not conducive to economic risk-taking - poor public education and health
- key driver of human capital and knowledge capital - low rates of savings and investments
- money must often be borrowed to undertake capital investment
aggregate expenditure
total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports
Macroeconomic Equilibrium
Aggregate expenditure = GDP
Where does the difference between GDP and AE show up?
The difference shows up in the Investment of CIG(NX)
Inventories
goods that have been produced but not yet sold
Actual investment will equal planned investment only when…
there is no unplanned change in inventories
EX: In 2010, America bought a little less than everything we produced
next year, we don’t need to produce as much
- what we produce the follow year will therefore decrease
- employment may decrease with this loss of production
If AE = GDP, then inventories are ____________ AND the economy is in ____________
inventories are unchanged and economy is in macroeconomic equilibrium
If AE < GDP, then inventories ___________ AND both GDP and employment will ___________
If AE < GDP, inventories rise, GDP and employment will decrease the following year
If AE > GDP, then inventories will _________ and both GDP and employment will _________ the following year
If AE > GDP, then inventories will fall and both GDP and employment will increase the following year
what five things drive AE in regards to consumption?
- Current disposable income
- as income goes up, consumption goes up - Household wealth
- as wealth increases, consumption increases - Expected future income
- as expected income rises, consumption increases - The Price Level
- as price level rises, consumption goes down - The Interest Rate
- as interest rate rises, consumption decreases
consumption function
the relationship between consumption spending and disposable income