V3

Question 1

Productivity

Answer 1

The amount of goods and services produced for each hour of a worker’s time. Determines living standards.

Question 2

GDP per Capita

Answer 2

Measures income per head: total GDP divided by the population.
GDP per worker is a measure of the income per head of the working population

Question 3

Physical Capital

Answer 3

Stock of equipment and structures used to produce goods and services. Includes tools and buildings.
Physical capital is a produced factor of production.
It is an input into the production process that in the past was an output from that process.
/worker

Question 4

Human Capital

Answer 4

Knowledge and skills acquired by workers through education, training, and experience.

Question 5

Natural Resources

Answer 5

Inputs provided by nature. Can be renewable (forests) or non-renewable (coal).

Question 6

Technological Knowledge

Answer 6

Understanding of the best ways to produce goods and services.

Question 7

Production Function

Answer 7

Relationship between inputs (labour, capital, resources) and output. Y = A F(L, K, H, N).
− Y = quantity of output
− A = available production technology
− L = quantity of labour
− K = quantity of physical capital
− H = quantity of human capital
− N = quantity of natural resources
− F( ) is a function that shows how the inputs are combined
* A production function has constant returns to scale if, for any positive number x,
− xY = A F(xL, xK, xH, xN)
* A doubling of all inputs causes the amount of
output to double as well
* Production functions with constant returns to
scale have an interesting implication
* Setting x = 1/L results in:
− Y/L = A F(1, K/L, H/L, N/L)
− Where:
− Y/L = output per worker = labour productivity
− K/L = physical capital per worker
− H/L = human capital per worker
− N/L = natural resources per worker

Question 8

Solow Growth Model

Answer 8

Explains growth via capital accumulation and population growth. Subject to diminishing returns.

Question 9

Diminishing Returns

Answer 9

As capital increases, additional output decreases for each additional unit of capital.

Question 10

Catch-Up Effect

Answer 10

Countries starting with low levels of capital tend to grow faster than those with high levels of capital.

Question 11

Investment

Answer 11

Creation of new productive assets, like building factories. Increases future productivity.

Question 12

Saving

Answer 12

Reducing consumption today to invest in future capital.

Question 13

Foreign Direct Investment

Answer 13

Investment owned and operated by a foreign entity.

Question 14

Human Capital Investment

Answer 14

Investment in education and training for long-term growth. Each year of schooling raises wages by 10%.

Question 15

Property Rights

Answer 15

Ability to exercise authority over one’s own resources. Essential for a functioning market.

Question 16

Free Trade

Answer 16

Encourages economic growth similar to a technological advance. Outward-oriented policies often succeed.

Question 17

Endogenous Growth Theory

Answer 17

Long-run economic growth results from new knowledge and technology creation.

Question 18

Steady-State

Answer 18

Point where investment equals depreciation in capital, maintaining constant capital-output ratio.

Question 19

Population Growth

Answer 19

Impacts labour productivity: stretching resources but promoting technological advances.

Question 20

Corruption

Answer 20

Hampers growth by undermining property rights and creating instability.

Question 21

Indexation

Answer 21

When some money amount is automatically corrected for inflation by law or contract,
the amount is said to be indexed for inflation (CPI?).
− Many government transfer payment systems use indexation for the benefits.
The government often also adjusts tax brackets used for income tax in line with inflation.
− There are uses of indexation in the private sector as well.
Many contracts between firms and trade unions include Cost-of-Living Allowances.

Question 22

Interest Rates

Answer 22

Interest represents a payment in the future for a transfer of money in the past.

Question 23

Real and Nominal Interest Rates

Answer 23

The nominal interest rate is the interest rate usually reported and not corrected for inflation.
− It is the interest rate that a bank pays.
* The real interest rate is the nominal interest rate that is corrected for the effects of inflation.
* Here is a simple example
− You borrowed €1,000 for one year.
− Nominal interest rate was 15%.
− During the year inflation was 10%.

Real interest rate = Nominal interest rate – Inflation
= 15% - 10% = 5%

Question 24

Economic Growth

Answer 24

A country’s standard of living depends on its ability to produce goods and services
* Within a country there are large changes in the standard of living over time
− In Switzerland (real) GDP per capita (average income) has grown on average by about 0.8 per cent
per year since 2000
− This means that GDP per capita increased by 21 per cent since 2000
− It implies that GDP per capita doubles roughly every 87 years
* Annual growth rates that seem small become significant when compounded for many years
− If the annual growth rate of Swiss GDP per capita had just been one-tenth of one percent higher
since the start of this century, an average individual would have earned an additional CHF 24,590

Question 25

Living standards, as measured by real GDP per capita, vary significantly among nations

Answer 25

Living standards, as measured by real GDP per capita, vary significantly among nations − The United Kingdom is an advanced economy. In 2019, its GDP per capita was $42,230 − Poland is a middle-income country. In 2019, its GDP per capita was $15,630 − The Central African Republic is a poor country. In 2019, its GDP per capita was only $441

Question 26

Growth Theory

Answer 26

* The trend rate of growth is: − The average sustainable rate of economic growth over a period of time * Trend growth and actual growth are important factors when we look at business cycles * The Solow theory has been used to explain economic growth − It identifies the rate of human and physical capital and population growth as being key determinants * Economists have identified other factors that may influence productivity and thereby economic growth − How open to trade a country is − How easy it is to do business and how and the extent to which corruption is minimised − The extent to which violence, war and conflict exist in a country − Regional, institutional and cultural characteristics − Geographical factors such as physical resource endowments and climate * Productivity plays a key role in determining living standards for all nations in the world

Question 27

Why Productivity Is So Important

Answer 27

* To understand the large differences in living standards across countries, we must focus on the production of goods and services * A nation can enjoy a high standard of living if it can produce a large quantity of goods and services * Hence, to understand the large differences in living standards we observe across countries or over time, we focus on the production of goods and services

Question 28

How Productivity Is Determined

Answer 28

* The inputs used to produce goods and services are called the factors of production * The factors of production directly determine productivity * Labour productivity is the amount of output per worker − It will rise if the capital stock increases − However, because of diminishing marginal product, the rate of increase in average labour productivity will decline as the capital stock per worker increases * The factors of production include: − Physical capital − Human capital − Natural resources − Technological knowledge * The factors of production directly determine productivity