Long-run Economic Growth

Question 1

Real GDP per capita equation

Answer 1

Real GDP/ Total population

Question 2

Real GDP per worker equation

Answer 2

Real GDP/number of people in employment

Question 3

Growth rate of real GDP in year A equation

Answer 3

GDP (yrA) - GDP (yrA-1)/ GDP (YrA-1) all x100

Question 4

What type of growth is necessary for a country to experience considerable improvements in living standards

Answer 4

Sustained growth

Question 5

What is the Rule of 70

Answer 5

An economy growing at x% would double its size in 70/x years

Question 6

What two key factors did Robert Solow and Trevor Swan identify for economic growth

Answer 6

• The rate of human and physical capital growth
• The rate of population growth

Question 7

Examples of other causes influencing growth that other economists have identified

Answer 7

• Trade openness
• Macro stability

Question 8

Productivity equation

Answer 8

Total output/ units of the factor

Question 9

Productivity definition

Answer 9

The quantity of g/s produced from each hour of a worker or factor of production’s time

Question 10

Why is productivity so important

Answer 10

Productivity when producing g/s is the key determinant of standard of living

Question 11

What are the 4 determinants of productivity

Answer 11

• Human capital (ability to catch fish)
• Physical capital (tools to catch fish)
• Natural resources (fish supply)
• Technological knowledge (Invention she makes to catch more fish)

Question 12

Physical capital definition

Answer 12

Stock of equipment and structures used to produce goods

Question 13

Human capital definition

Answer 13

Knowledge and skills that workers acquire through education, training and experience

Question 14

Is natural resources a necessary condition for growth

Answer 14

NO

Question 15

Natural resources definition

Answer 15

Inputs that are provided by nature such as land, rivers etc

Question 16

Technological knowledge definition

Answer 16

Society’s understanding of the best ways to produce goods and services

Question 17

How is technological knowledge different to human capital

Answer 17

Tech knowldge is society’s understanding, not workers’ understanding

Question 18

When was the Solow-Swan growth model published

Answer 18

1956

Question 19

What does the Growth model assume GDP depends on

Answer 19

• Productivity, Labour and physical capital

Question 20

Equation for Solow-Swan Model

Answer 20

Y =A x f(L,K)
Where F(L,K) is production function

Question 21

What type of returns is the production function assumed to have in this model

Answer 21

Constant returns to scale

Question 22

What is the closed economy equation within the model and what does it imply for investment

Answer 22

Y (GDP) = C +S
S=I

Question 23

What is the impact of higher savings in this model

Answer 23

• More people save, higher investment (S=I)
• Higher investment means more future capital for production

Question 24

What are increases in capital and labour subject to

Answer 24

Diminishing marginal product

Question 25

Marginal product equation

Answer 25

Change in total product/ Change in the quantity of a factor

Question 26

What determines the GDP for a given level of physical capital

Answer 26

- Level of technology - Productivity of labour and capital

Question 27

Why is this model also called the exogenous growth model

Answer 27

The savings rate is exogenous

Question 28

How is the equilbirum K determeined in this model

Answer 28

When investment per worker exactly replenishes the depreciated capital

Question 29

What is the steady state equilibrium

Answer 29

- Investment= depreciation -capital per worker stops changing and the capital-output ratio does not change

Question 30

In the steady state, what is the only way the economy can grow

Answer 30

Through increases in productivity

Question 31

How does an increase in the savings rate impact the economy

Answer 31

- Increase in savings rate means increase in investment so more capital - Thus physical capital per worker increases - Economy grows and consumption increases

Question 32

What do changes in the population depend on

Answer 32

- Birth rate - Death rate - Migration Rate

Question 33

What is capital dilution

Answer 33

When the population grows but investment only covers depreciation not extra capital needed for more workers

Question 34

What must investment cover in a growing population to keep capital per worker constant

Answer 34

Capital dilution

Question 35

Can population growth benefit an economy

Answer 35

- YES, More people means more chances for innovation

Question 36

What is the impact of an increase in technology on output for a given capital per worker and why

Answer 36

It increases as it makes both labour and capital more productive

Question 37

What does an increase in technology offset the effect of

Answer 37

The effects of diminishing marginal product

Question 38

What is endogenous growth theory

Answer 38

A theory that the rate of long run economic growth is determined by productivity which is dependont on the rate of technological progresses

Question 39

Who makes decisions in exogenous growth models

Answer 39

No one

Question 40

How is endogenous growth models different

Answer 40

- They are micro founded - Individual agents make optimal decisions - Aggregate outcomes come from these decisions

Question 41

What is a key explanation of why technology has changed at a rapid rate since 1960s

Answer 41

Investment in R and D by firms

Question 42

What is it called when workers' skills and firms' technologies go obsolete due to tech

Answer 42

Creative destruction

Question 43

What role does the government have in offsetting creative destruction

Answer 43

Using public policy such as retraining schemes and unemployment benefits

Question 44

What does an increase in savings imply

Answer 44

An increase in investment and thus more capital goods tomorrow

Question 45

Examples of countries with high investment rates and strong growth rates

Answer 45

China, Japan and Australia

Question 46

What type of policies can generate growth

Answer 46

Ones which incentivise saving and investments

Question 47

What can an increase in the saving rate cannot deliver

Answer 47

indefinite long run growth

Question 48

What is the catch-up effect

Answer 48

Countries that start off poor tend to grow more rapidly than countries that start off rich

Question 49

Example of catch up effect

Answer 49

China devoted fewer resources to investment than Japan but grew at almost twice the rate

Question 50

What does the Solow model assume about foreign investment

Answer 50

Assumes a closed economy, savings by domestic residents is the only way to invest

Question 51

What is FDI

Answer 51

Capital investment that is owned and operated by a foreign entity

Question 52

How does Foreign investment impact GNP and GDP

Answer 52

Foreign investment rises GNP less than GDP

Question 53

How does foreign investment impact productivity and wages

Answer 53

They increase them by increasing the stock of capital

Question 54

How much does an extra year of education raise worker's income by in developed countries

Answer 54

10%

Question 55

What is the opportunity cost of education

Answer 55

-The wages students don't earn - Particuarly prevalent in less developed countries

Question 56

What does education generate

Answer 56

Positive externalities

Question 57

What is a key issue related to education that poor countries face

Answer 57

Brain Drain

Question 58

What is Brain Drain

Answer 58

Emigration of high skilled workers to rich countries

Question 59

How does health and nutrition impact a population

Answer 59

Increase the standard of living and productivity

Question 61

How does good governance benefit a country

Answer 61

It increases the probability of contract enforceability and market efficient allocations

Question 62

What is the infant industry argument (inward oriented policy)

Answer 62

Domestic firms' need for protection to compete and grow

Question 63

How do countries with inward oriented policies fair vs outward oriented countries

Answer 63

Substantially lower growth rates

Question 64

How can the gov encourage R and D

Answer 64

- Research grants - Tax breaks

Question 65

What other system massively encourages R and D

Answer 65

a patent system