W3 - Economic Growth Flashcards
(25 cards)
What is economic growth?
Sustained expansion in the productive capacity of the economy, using real gdp
How to work out the Growth rate?
100 x (GDP current yr - GDP previous yr)/ GDP previous yr
(using real GDP)
One problem with using growth rate as a measure of economic growth
Doesn’t consider inequality as it’s an average
What is a driver for economic growth
Innovation and tecnology
(E.g Industrial rev drove economic growth but did leave some behind)
What is the Great Divergence of 1928-2013?
How Western Europe and North America outpaced the rest of the world economically after the industrial rev
The production function and real GDP
Real GDP: Y = K^L^-1
K - physical capital
l - no. of workers
Increases in Y becomes less - diminishing returns
What are the theories of economic growth?
- Malthusian growth theory
- Neoclassical growth theory
- Endogenous growth theory
- explain by hockey stick
What is the Malthusian Growth theory?
1798
- States that growth in Real GDP leads to population growth that holds back real GDP per person
- Economic gains are eaten up by population growth
- Population growth will always outpace food and resources = no sustained living standards
Pre-industrial theory
- Explains the handle (shaft)
What is the Neoclassical Growth theory?
Econ growth comes from capital acculimation (machine, tools), depends on saving and investment
- BUT diminishing returns of capital, saving not sustainable growth always
- Long run need Tech progresses
- Adds K to production function
- Explains the take off part, not the blades continuous rise
What is the endogenous growth theory ?
Growth is driven by this inside the economy
- Human capital
- Innovation
- Knowledge spillovers
- TEch
- Growth can kkeep compounding if we invest in ideas, people and innovation
- Why the blade keeps rising
Policies that can increase growth:
- Education and training
- Subsidies for Research and Development (knowledge is a + externality)
- Improvements in institutions
What is the poverty trap?
Explains why some countries remain poor while others have prospered
- Agricultural economy with little capital or technology
How can a country get out of the Poverty trap?
Need a big push
- Aid = encouraged to go to doctors by offering free (e.g soup)
- Microfinance - local people come together to sell loans for farmers
- Nutrition
How to work out approximate growth rate?
Ln (real GDP P.P) - Ln (real GDP P.P previous) x 100%
What GDP to use when measuring development and growth?
Real GDP
Real GDP Per person
What are the rules for looking at economic growth?
Ratio Rule
Rule of 70
What is the ratio rule
Approx growth rate of a ratio is the difference in growth rates, different perspective
How to work out growth in real GDP per person?
Real GDP growth - Population growth
What is the rule of 70?
No. of years it takes for a variable to double is approx 70/ annual growth rate of variable
- shows that small improvements in growth have big consequences
How to work out years for growth rate to double
70/ growth rate
How to work out Compound growth
GDP in n years = (1+g)^n GDP Today
- Where rule of 70 comes from
What and how symbolises the economic growth theories
Hockey stick
- Shows slow growth (stick) then a sudden sharp take off starting around the industrial rev
Causes of economic growth
- Investment in capital goods (e,g tech, factories)
- Improve human capital (education + training)
- Tech progresses
- Gov policy (tax incentives)
- Trade + globalization
Benefits of economic growth
- Higher income + living standard
- Employment opportunities
- High tex revenue
- Potential decrease in poverty
