Growth Part 1 Flashcards
Why do we care about growth?
We need a deeper understanding of the standard of living in different areas
What variable is used to make comparisons over time?
Real output per capita
What is the variable used to measure growth?
Output per capita
Why shouldn’t we use common currency as a comparison measure of GDP across different countries?
- Exchange rates vary more than relative standards of living
- Market exchange rate doesn’t reflect relative prices of non-traded products - e.g. housing and food
How should we compare GDP across countries instead?
Use a common set of prices for all countries
What do adjusted real GDP numbers aim to take into account?
How purchasing power differs across countries
What’s the common name for adjusted real GDP numbers?
Purchasing Power Parity Numbers
Where are PPP numbers taken from?
Penn World Tables
What are the Penn World Tables?
PPP series for GDP and expenditure components for most countries in the world
What effect does the market exchange rate have on the difference in standard of living between high and low GDP nations?
Market exchange rate exaggerates difference - difference is narrower when taking local prices into account
What relation does GDP per capita have with life satisfaction?
As GDP per capita increases, the average life satisfaction of individuals generally increases.
How do you calculate growth rate?
100 x (GDPt - GDPt-1)/GDPt-1
How do you calculate average annual growth rate in a country over a period of time?
g = (GDPt / GDP1styr)^1/n - 1
What is economic growth?
An increase over time in the quantity of goods and services produced by a country
How do each of these measures differ when measuring rate of growth?
A) Real GDP
B) Real GDP per Capita
C) Use of PPP numbers
A) adjusts for inflation
B) adjusts for inflation and size of population
C) takes relative prices into account
Where is there clear evidence of convergence?
- All countries with high levels of output per person
- Most asian countries - four tigers have started catching up with Japanese output
What does convergence mean in terms of GDP per capita?
- Levels of income per capita should coincide in the long run
- Lower income countries should grow faster than higher income countries
Where is there no evidence of convergence?
Africa
What are the two equations the Solow model is built around?
- A production function
- A capital accumulation equation
What is the aggregate production function?
- The relation between aggregate output and input
- Y = F (K,N)
- Y = Aggregate Output
- K = Capital - sum of all the machines
- N = Labour - sum of all the workers in the economy
What does the function tell us?
- How much output is produced for given quantities of capital and labour
- Dependent on the state of technology
What are constant returns to scale?
- If quantities of capital and labour are doubled, output will also double
- 2Y = F (2K, 2L)
- xY = F (xK, xL)
Returns to Factors
What do we expect to happen if only one of the two inputs is increased, holding the other constant?
What does decreasing returns to capital mean?
Property that increases in capital, given labour, lead to smaller and smaller increases in output as the level of capital increases
