The real economy in the long run

Question 1

What does a country’s standard of living depend upon?

Answer 1

Its ability to produce goods and services

Question 2

The rate of what varies greatly?

Answer 2

Growth

Question 3

What do the poorest countries have that the UK has not seen for many decades?

Answer 3

Average levels of income that haven’t been seen in the UK for a very long time

Question 4

What does productivity play a key role in?

Answer 4

Productivity plays a key role in determining living standards for all nations in the world

Question 5

What does productivity refer to?

Answer 5

The amount of goods and services that a worker can produce for each hour of work

Question 6

What is needed to understand the large differences in living standards?

Answer 6

The production of goods and services

Question 7

What is meant by factors of production?

Answer 7

These are the inputs used to produce goods and services

Question 8

What are 4 factors of production?

Answer 8

Physical capital
Human capital
Natural resources
Technical knowledge

Question 9

What type of factor of production is physical capital?

Answer 9

It is a produced factor of production

Question 10

What is meant by “produced factor of production”?

Answer 10

An input into the production process that in the past was an output from the production process

Question 11

Define physical capital

Answer 11

The stock equipment and structures used to produce goods and services

Question 12

Give three examples of physical capital

Answer 12

Tools used to build or repair vehicles
Tools used to build furniture
Office buildings, schools etc

Question 13

Define human capital

Answer 13

Term for the knowledge and skills that workers acquire

Question 14

What 3 things are examples of knowledge and skills workers acquire as part of human capital?

Answer 14

Education
Training
Experience

Question 15

What is human capital similar to and why?

Answer 15

It is similar to physical capital. It raises a nation’s ability to produce goods and services

Question 16

Define natural resources

Answer 16

Inputs used in production that are provided by nature such as land, rivers and mineral deposits

Question 17

What are the two main categories of natural resources?

Answer 17

Renewable and non-renewable

Question 18

Give two examples of non-renewable resources

Answer 18

Coal

Petroleum

Question 19

Give two examples of renewable resources

Answer 19

Trees and forests

Question 20

How important are natural resources to the economy?

Answer 20

They can be important but aren’t necessary for an economy to be highly productive in producing goods and services

Question 21

Define technical knowledge

Answer 21

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

Question 22

What does human capital refer to?

Answer 22

The resources expended to transmitting this understanding to the labour force

Question 23

How do productivity and living standards improve?

Answer 23

Governments use policies

Question 24

Give 6 government policies used to raise productivity and living standards

Answer 24

Encourage investment from abroad
Encourage saving and investment
Establish secure property rights and maintain political stability
Promote free trade
Promote research and development
Encourage investment and training

Question 25

What is another way to raise future productivity?

Answer 25

To invest more of current resources into the production of capital

Question 26

What does investing more of current resources into the production of capital mean that we have to do?

Answer 26

We have to consume less today in order to save more

Question 27

What is the aggregate production function determined by?

Answer 27

This is determined by technology and capital and labour productivity for a given level of physical capital stock

Question 28

What does the savings rate determine?

Answer 28

The level of investment

Question 29

How can you find the level of GDP consumption from the aggregate production function

Answer 29

It is the difference between the aggregate production function and investment

Question 30

What is an increasing physical capital stock associated with?

Answer 30

An increasing physical capital stock is associated with rising GDP

Question 31

Why does GDP increase from increasing physical capital slow?

Answer 31

Because of diminishing marginal product

Question 32

Explain the property of diminishing returns

Answer 32

As the stock of capital rises, the extra output produced from an individual unit of capital falls

Question 33

What happens as a result of diminishing returns?

Answer 33

There is an increase in the saving rate which leads to a higher growth only for a while

Question 34

What does a higher saving rate lead to in the long run?

Answer 34

A higher saving rate leads to a higher level of productivity and income, but not to a higher growth of these

Question 35

What does the catch up effect refer to?

Answer 35

This refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Question 36

How can governments increase capital accumulation and long-term economic growth?

Answer 36

By encouraging investment from foreign sources

Question 37

What are 2 key types of investment from abroad?

Answer 37

Foreign Direct Investment | Foreign Portfolio Investment

Question 38

What is FDI?

Answer 38

Capital investment owned and operated by a foreign entity

Question 39

What is FPI?

Answer 39

Investments financed with foreign money but operated by domestic residents

Question 40

What is an issue with investment from abroad?

Answer 40

The profits don't end up in that country

Question 41

Why is education important for long term growth?

Answer 41

Each year of education can increase a person's wage which can improve their standard of living

Question 42

How can an educated person benefit the economy?

Answer 42

By generating new ideas about how best to produce good and services

Question 43

What is one issue as a result of lack of education in poor countries?

Answer 43

Brain drain

Question 44

What can human capital investments refer to?

Answer 44

Investments in people such as improvements in improved health

Question 45

What did Fogel conclude about per capita income and nutrition?

Answer 45

Improved nutrition accounted for almost a third of growth in per capita income

Question 46

What do property rights refer to?

Answer 46

The ability of people to exercise authority over the resources that they own

Question 47

What is an important prerequisite for the price system to work?

Answer 47

An economy-wide respect for property rights

Question 48

What will a country that eliminates trade restrictions experience?

Answer 48

It will experience the same kind of economic growth that would occur after a major technological advance e.g a country that exports wheat and imports steel it would benefit in the same way as a if it had invented a way to turn wheat into steel.

Question 49

Where do most technological advances come from?

Answer 49

Private research by firms and individual invenntors

Question 50

How can the government encourage the development of new technologies?

Answer 50

Through research grants, tax breaks and the patent system

Question 51

In what 3 ways does population growth interact with factors of production?

Answer 51

Stretching natural resources Diluting the capital stock Promoting technological properties

Question 52

Why is the return to capital especially high in poor countries?

Answer 52

Because of diminishing returns