Modern Economy Flashcards
(21 cards)
Why did the UK experience sustained economic growth first?
- UK experienced the industrial revolution first due to a series of important inventions
- productivity increased in britain first
Why was the UK the first to invent technologies?
- British constitution- Atlantic trade strengthened merchant groups who obtained protection of property rights
- Culture- money acquired in industry was less tainted by stigma of being nuveau rich
- Relative prices- higher wages incentivised labour saving technologies
Solow model assumptions of modern economy
- GDP produced using labour and capital
- for given capital, if labour increases, GDP increases
- diminishing returns on labour
Fundamental law of motion of capital
Shows how capital accumulation occurs and how it is dependent on the economy’s saving rate and depreciation rate
When can capital no longer be accumulated?
When investment equals depreciation
How does an increased saving rate affect capital accumulation
This increases the level of capital per person and therefore GDP per capita. Long run growth is still zero tho
How does population growth affect capital accumulation?
This decreases the level of capital per person and therefore GDP per capita
What does the solow model predict about countries wealth?
Countries with higher saving rates and lower population growth are richer
What is AL?
Efficiency units of labour
What does the stock of capital per efficiency unit depend on?
g^a
What does the solow model say are the two engines of growth?
Technological progress and capital accumulation
What is the steady state of growth ?
g=g^a
Policies for increasing growth
- Give subsidy to investment or tax cuts to savings
- Demographic control (one child policy in China)
Both policies increase growth temporarily g>g^a but in the long run they only have level effects
In which economies does capital play a small part?
In service economies (banking and sport)
How is human capital accumulated?
By spending time learning
According the modified solow model with human capital why are certain countries rich?
Because they have
•a high investment rate in physical capital/ human capital
•high level of technology
•low population growth
Failures of solow model
Ignored technological level it only accounts for technological growth
What is it better to interpret A as?
It is better to interpret A as total factor production since it is a residual absorbing all differences between countries not captured by K and H
Why do ideas only need to be produced once?
Because they are non rivalrous so everyone can use them
Describe the structure of costs for ideas
Ideas have very high fixed costs but very low marginal costs, this implies increasing returns to scale
Why does the growth of ideas rely on imperfect competition
Firms will only produce ideas if it will be profitable. They charge a price for consuming the good which is above the marginal cost in order to make up for the high fixed costs. This doesn’t occur in perfect competition
