List and describe four determinants of productivity
Physical capital: workers are usually more productive if the capital stock is high, constraint by the law of diminishing returns on capital.
Human capital: it is used as a synonym for the knowledge and skills of the workforce acquired through education.
Natural resources: are production input factors that are provided by nature, such as land mineral deposits etc.. They can play a huge part in the development of a country’s living standard if the supply is high.
Technological knowledge: refers to society’s understanding about how the world works and how production factors are used in the best way to produce goods and services
In what way is a university degree a form of capital?
It is an investment in human capital as it potentially enables the graduate to use physical capital as well as given technological knowledge in a more productive way, thus increasing his own productivity and contributing a larger share to society’s wealth.
Explain how higher savings lead to higher standard of living.
Saving play a key role for investments In future productive assets. The accumulation of capital follows a trade off between present consumption and future income. As economic resources are scare growth from capital accumulation is not a free lunch. For society to invest in more capital, it is necessary to sacrifice consumption in the present, hence same more of this current income.
What groups in society would benefit from this change?
reducing consumption and increasing investment
People working in retail and other consumer - oriented sectors potentially experience lower income and profits, as consumer and households save more of their income in order to increase the amount of loan able funds, which can be invested in capital asset,
People working in capital intense sectors experience higher income and profits, as the additional saved funds are invested respectively.
What is the opportunity cost of investing in capital?
Opportunity cost of investing in capital: present day consumption as investments cannot be financed without prior savings. If investments are not backed by the real savings and are not the result of market process over and malinvestments can occurs.
Opportunity cost of investing in human capital: via education and training are the forgone utilization in the production process and income the workers and employees could have earned.
South Korean citizen opens a new factory in the north of England:
A) what kind of foreign investment?
B) what are the effects on UKs GDP?
A) foreign direct investment
B) the plant increases the capital stock of the UK and, therefore increases UKs GDP. The impact on GNP would be lowered.
Explain the neoclassical production function. Look at PDF slide 9/10
The aggregate notional income is a function of capital and labor. (Y=f(C,L)). Thereby, the importance of savings is stressed. The savings ratio determines the future capacity of an economy as saving finance investment.
Explain the term catch up effect.
Means that economies with a lower level of capital have higher marginal returns with the first additional inputs of capital, thereby outperforming wealthier nations in average labor production.
Explain the difference between gross and net investment .
Gross investment comprises the total spending on capital goods in an economy. Net investment accounts for capital expenditure less of investment spending for depreciation of existing capital goods.
Explain with an example a foreign direct investment.
BMW buildings a factory in Spain. Hence, the Spanish GDP increases due to BMWs investment spending in the country. BMW profits from investment because labor costs are cheaper, thus increasing the domestic profit of BMW in Germany.
Explain how the respect of property rights is a prerequisite for economic growth.
Property rights are an important prerequisite for a price system to work. Property rights are the most basic incentives for producers to produce, as they can be sure that the income they receive out of the productions process belongs to them.
Explain how time preference is impacted by political stability.
In politically unstable countries, the time - preference of the inhabitants is likely to increase, as individuals and households are not save fro. Illegal expropriation. Hence, the incentive for saving and investing in capital goods, or the formation of private wealth diminishes.
What is regime uncertainty?
Regime uncertainty means that due to increased legislation. The legal certainty of a country diminishes, thereby negatively affecting investment decisions of corporations.
Explain what Karl Marx meant by “surplus value”.
Surplus value is the value created by workers in excess of the cost of their own labor, which is appropriated by the capitalist as profit when products are sold.
Explain what Eugen Böhm Bawerk meant by “a roundabout way of capitalistic production”.
Generally it can be said, that by not consuming all pounds presently, but saving them and converging these savings into intermediate goods we are in position to increase our future wealth due to higher productivity.
Explain how he refuted the theory of labor exploitation by Karl Marx.
The central error of Marx is, that time preference is not taken into account. laborer so cannot wait until final goods are available out of the roundabout process, thereby demanding immediate payment by the capitalist, which makes instant consumption possible. Due to the fact that laborers demand Instant gratification, no exploitation occurs in the contract between the capitalist and the laborers.