week 16

Question 1

how have living standards improved

Answer 1

variety, quality and quantity of goods and services increased during the 19th and 20th century, as reflected in real GDP
but comparing economic output over 100 years cannot account for new goods/services

Question 2

what are living standards

Answer 2

real GDP per person is a measure of goods available to a typical person

Question 3

what are the benefits of growth

Answer 3

pace of technical change is growing
inventions are not sufficient to sustain growth so goods must be sold

Question 4

what is compound interest

Answer 4

pays interest on the original deposit and all previously accumulated interest
small growth in GDP can have a large effect over a long period

Question 5

how do you find real GDP per person

Answer 5

(real GDP/number of employed workers) x (number of employed workers/population)

Question 6

what does real output depend on

Answer 6

how much each worker can produce
the percentage of the population that is working

Question 7

what determines a country’s economic growth rate

Answer 7

increases in output per person arise primarily from increases in average labour productivity

Question 8

when does GDP per capita increase

Answer 8

when output per worker increases or share of population employed increases

Question 9

what causes growth

Answer 9

in the long run
increases in output per person and living standards arise from increases in average labour productivity

Question 10

what factors determine average labour productivity

Answer 10

human capital
physical capital
land and natural resources
technology
entrepreneurship and management
political and legal environment

Question 11

what is human capital

Answer 11

talents, education, training and skills of workers
increases productivity and innovation
causes higher output and economic prosperity

Question 12

what is physical capital

Answer 12

more and better capital (machinery, equipment, buildings etc) increases worker productivity and raises quality

Question 13

what are diminishing returns to capital

Answer 13

the amount of labour and other inputs is constant then the greater the amount of capital already in use, less additional unit of capital adds
assumes all inputs except capital are held constant
causes output to increase at a decreasing rate

Question 14

what are the implications of diminishing returns

Answer 14

increasing capital will increase output and labour productivity
positive contribution to growth

Question 15

how does land and other natural resources improve labour productivity

Answer 15

increase worker productivity, creates jobs and generate revenue
land - used for farming and agriculture, produce food and raw materials for export, major contributor to some economies
extraction of natural resources - provides jobs and income, drives innovation
tourism - provides revenue
renewable energy - can be produced from land and natural resources

Question 16

how does technology improve labour productivity

Answer 16

new tech is the most important improvement of productivity
improves efficiency and innovation at lower costs

Question 17

what is the productivity puzzle

Answer 17

cause of slow down of growth is unknown, unclear if this is temporary or not
recent growth mainly linked to tech making workers more productive

Question 18

how does entrepreneurship and management increase productivity

Answer 18

entrepreneurs create new economic enterprises and identify business opportunities
needed for a dynamic, healthy growing economy
take risks and create new products or services
create jobs and increase productivity
increase competition

Question 19

how does political and legal environment increase productivity

Answer 19

encourage people to be economically productive
political stability attracts investment and promotes growth
having a fair and predictable legal environment also supports economic growth

Question 20

why is capitalism successful

Answer 20

provides incentive for individuals to create new products to make profit
allows resources to be allocated efficiently
encourages investment in human and physical capital, furthering growth
gives consumers choice of a wide range of products
contributes to economic growth

Question 21

why does communism fail

Answer 21

advocates for a classless society in which all property and resources are collectively owned
struggle to produce enough goods to meet needs of people
centralised planning causes inefficiency and lack of innovation
also causes political instability due to lack of freedom

Question 22

what is the solow growth model

Answer 22

shows relationship between quantities of inputs used in production and economy’s total output (Y)
2 inputs - physical capital K and labour N

Question 23

what is physical capital

Answer 23

consists of machines and buildings used in production of economy’s GDP

Question 24

what is labour

Answer 24

number of workers used in production of goods and services

Question 25

what is the production function

Answer 25

Y = F(K,N) output is a function of the quantities of capital and labour used in the production process

Question 26

what are constant returns to scale

Answer 26

if labour and capital inputs are both increased by equal proportions, total output increases by the same proportion CRS function: zY = F(zK, zN), where z is any positive number

Question 27

what is marginal product of capital (MPK)

Answer 27

assumed to be decreasing MPK = change in Y / change in K

Question 28

what is the production function

Answer 28

shows how average labour productivity increases with capital per worker for constant labour force the slope measures MPK

Question 29

what is the solow growth model

Answer 29

assumes that investment is financed by saving saving is a constant fraction of income Y I - investment S - saving s - saving rate I = S = sY - in per capita terms i = s*f(k) after dividing by N

Question 30

how much investment is needed to keep capital-labour ratio constant

Answer 30

depends on depreciation rate and population growth

Question 31

how does depreciation affect solow growth

Answer 31

part of capital stock that wears out and becomes les productive if capital depreciates at rate d, investment must be dk to keep capital from falling

Question 32

how does labour force affect solow growth

Answer 32

labour force grows at rate n per period economy needs an investment of nk to keep capital-labour ratio constant investment per head needs to be (d+n)k to maintain constant capital-labour ratio

Question 33

how does increasing saving rate affect solow growth

Answer 33

shifts investment curve upwards, leading to higher investment equilibrium capital-labour ratio increases from k1 to k2, productivity increases from y1 to y2 labour productivity increases and growth of output Y exceeds population growth n

Question 34

how does solow growth model explain economic growth

Answer 34

average labour productivity depends on the amount of physical capital per head in the workforce the economy's steady state growth rate should equal rate of population growth in the long run

Question 35

how does increasing labour productivity cause greater technical progress

Answer 35

improvement in knowledge enables higher output from existing resources y = Af(k) where A is technical progress if technology improves by g percent per year then A = (1+g)

Question 36

how does technology effect the solow model

Answer 36

technical progress causes an increase in overall productivity more output can be produced with the same inputs marginal product of capital increases, higher rates of investment and capital accumulation causes higher living standards and economic growth

Question 37

what is total factor productivity

Answer 37

entrepreneurship - introduce new production methods and create economic enterprises political and legal environment - establish property rights and effect investment

Question 38

how does human capital affect the solow model

Answer 38

higher human capital causes living standards to be higher, even if capital-labour ratio is the same

Question 39

how did covid affect growth

Answer 39

period of low investment closing schools reduces human capital unemployment and health issues could reduce working population

Question 40

how does democracy affect growth

Answer 40

associated with higher human capital, higher economic freedom and less political instability tied to growth sources like education and healthcare

Question 41

what are the costs of economic growth

Answer 41

increasing capital stock, increases GDP in the long run opportunity cost of producing capital goods : fewer consumed goods, less leisure, health risks, cost of R&D, cost of education

Question 42

how does human capital promote growth

Answer 42

govs support training and education govs pay as education has externalities: democracy works better, more taxes, increased technical innovation, poorer families cannot pay

Question 43

how do savings/investment promote growth

Answer 43

govs encourage capital formation and saving govs can invest directly in capital formation eg infrastructure

Question 44

how does R&D promote growth

Answer 44

promotes innovation gov sponsors military and space applications maintain political and legal framework to support growth

Question 45

how do you promote economic growth in less developed areas

Answer 45

more human and physical capital is needed need institutions to support growth corruption does not encourage investment regulation discourages entrepenuership taxes discourage risk taking markets don't function efficiently lack of political stability

Question 46

what are the limits to growth

Answer 46

depletion of natural resources - more efficient techniques to use and extract them, limit is environmental damage