Week 4 - Economic Growth

Question 1

Define economic growth

Answer 1

Economic growth refers to the growth in total (national) output.

Question 2

What is per capita growth

Answer 2

Per capita growth is the growth in output divided by the population. This is not always distributed evenly in reality.

Question 3

Why is the lack of growth a problem?

Answer 3

If there is no growth, stagnation occurs which can feel like a recession as people expect increasing output and income. The country falls relative to other countries.

Question 4

What is happening in Japan?

Answer 4

Japan is suffering from stagnation, in relative terms, its under performance has lead to it falling behind other countries. Consumption has also stagnated which has lead to no growth in the economy. Countries like this tend towards inflation.

Question 5

Difference between long and short run

Answer 5

In the short run, at least one variable is fixed while in the long run, all factors of production and costs are variable.

Question 6

Explain the Great Divergence

Answer 6

Prior to the 1700s, growth in different countries was largely the same. Since the industrial revolution, there has been significant variation

Question 7

Formula for through the year growth

Answer 7

Growth = new - old/ old

Question 8

What is the effect of compounding?

Answer 8

Relatively low growth rates lead to big changes over time. This means that over long periods, you can’t use the growth rate and divide by the time.

Question 9

Formula for finding compound growth rate

Answer 9

(ending value/starting value) ^ (1/time) -1

Question 10

How is production treated in the Solow-Swan model?

Answer 10

Uses the production function, Y = AKL

Question 11

How is the resource constraint treated in the Solow-Swan model?

Answer 11

An explicit constraint in put in place where output can either be used for consumption or investment
Income = consumption + investment

Question 12

How is capital accumulation treated in the Solow-Swan model?

Answer 12

Capital accumulation has to consider deflation

Capital new = capital old + investment old - depreciation rate times capital old

Question 13

How is labour treated in the Solow-Swan model?

Answer 13

Labour is considered an exogenous variable and is just L

Question 14

How is investment treated in the Solow-Swan model?

Answer 14

Total investment is a constant

Income - consumption = investment where income - consumption is savings

Question 15

Explain what drives what in the Solow-Swan model

Answer 15

capital stock and technology drive output per capita. Capital is driven, in part, by savings which drives investment

Question 16

Explain Net-payoff

Answer 16

Real output per hour and capital per hour has diminishing returns. Technology determines the curve (which is the trade-off between the two)

Question 17

Why are there diminishing returns?

Answer 17

Eventually, capital makes little change to productivity. For example, giving a worker a computer greatly increases productivity. Giving them a third one is less effective.

Question 18

What are the 4 factors of productivity?

Answer 18

1) Human capital
2) Technology
3) Institutions
4) Shocks

Question 19

Define human capital and 2 ways of improving it

Answer 19

Human capital is the stock of skills that individuals accumulate to make them more productive. Health and education can improve it.

Question 20

What is included in technology?

Answer 20

Technology includes process innovation, inventions, intellectual property etc

Question 21

What is an institution?

Answer 21

An institution refers to property rights, rule of law, government systems, organisational form, contract enforcement and policies.

Question 22

5 examples of shocks

Answer 22

famine, was, plague, oil shocks, mining boom

Question 23

What are three things that contribute to GDP growth

Answer 23

1) Participation
2) Population growth
3) Labour productivity (human and physical capital)

Question 24

Define innovation

Answer 24

Refers to the implementation of a new or significantly improved product, process or practice. The OECD estimates is accounts for 50% of growth.

Question 25

List 7 factors of living standards

Answer 25

1) material wealth
2) economic mobility
3) health
4) education
5) freedom
6) equality
7) safety from crime

Question 26

What is quality of life

Answer 26

Broad term referring to how people feel about their life and their enjoyment from it.

Question 27

Why does capacity utilisation matter?

Answer 27

Less capacity utilisation means lower growth as the slack is tying up resources that could be used elsewhere (entails an opportunity cost)

Question 28

Link between capacity utilisation and the Great Depression

Answer 28

The huge increase in ownership of goods (such as cars and radios) meant the markets were reaching saturation and there was too much productive capacity for demand resulting in underutilisation

Question 29

Link between capacity utilisation and the business cycle

Answer 29

The business cycle consists of alternations between slack periods (output capacity)

Question 30

What are 3 reasons for why business cycles tend to be less severe now?

Answer 30

1) The switch between manufacturing and more flexible services
2) government policies such as transfer payments which act as automatic stabilisers
3) Financial sector stability (regulation)

Question 31

Given the fact that there are diminishing returns from capital and labour, how can a country continue to grow infinitely?

Answer 31

Infinite increased in GDP can be acheived by increasing A as in the production function Output = Akl.

Unlike increases in K or L, which are movements along the curve, this pushes the curve out

Question 32

Impact of slowing investment in China and relation to the GFC

Answer 32

Australia fared better than most economies during the GCF due to the stimulus package and increasing demand for Australian exports (mining boom)

Slowing investment in China is contributing to lower demand for these exports, reducing growth as Y = C + G + I + NX. It also leads to declines in I as there is less incentive to invest.

In order to offset these falls, we need to shirt towards more consumption based growth (retail, clean energy, financial services, education etc).