Week 9 Flashcards
(22 cards)
What is long-run economic growth, and how is it measured?
Long-run economic growth is the sustained increase in a country’s output over time, typically measured by the growth rate of real GDP per capita, which reflects improvements in the standard of living.
What are some historical patterns and stylized facts of economic growth?
Growth patterns include:
- Uneven growth rates across countries,
- Growth miracles (e.g., East Asian NIEs) and growth disasters (e.g., Sub-Saharan Africa),
- Strong link between growth and poverty reduction, with growth often necessary to escape poverty.
What determines a country’s per capita income?
Per capita income depends on:
- Labour productivity (output per worker),
- Employment rate (share of working-age population employed),
- Capital intensity, technology, and human capital.
Does economic growth worsen inequality?
Growth can increase inequality, especially in the short term, but it can also lift people out of poverty. The Kuznets curve suggests that inequality initially rises with development but falls as economies mature.
How do legal and market institutions impact economic growth?
Effective legal institutions (e.g., property rights, judicial efficiency) and market institutions (e.g., competitive markets, governance) provide incentives for investment, innovation, and productivity, driving growth.
What is the “Tale of Two Koreas” example?
South Korea and North Korea illustrate the importance of institutions, with South Korea’s market-oriented policies leading to high GDP per capita, while North Korea’s centrally planned economy stagnated.
How do small differences in growth rates impact living standards over time?
Even small differences in growth rates can result in large differences in living standards over decades, as shown by the rule of 70: If a variable grows at x% per year, it will double in approximately 70/x years.
How would U.S. per capita income differ if it grew at India’s historical rate?
Growing at India’s rate (0.8% per year) instead of its own (1.8%) would drastically reduce U.S. living standards over the long term, underscoring the importance of sustained growth.
What is the Cobb-Douglas production function, and why is it significant?
The Cobb-Douglas production function Y=AK^αL^(1−α) represents output (Y) as a function of capital (K), labor (L), and total factor productivity (A), with constant returns to scale and diminishing marginal returns to each input.
How does the production function demonstrate diminishing returns?
As capital (K) increases with labour (L) constant, output (Y) increases at a decreasing rate, showing diminishing marginal productivity of capital.
What is the per capita production function, and what does it illustrate?
The per capita production function y=Ak^α shows output per worker (y) as a function of capital per worker (k). It highlights diminishing returns to capital, as increases in k lead to smaller increases in y.
What happens to output per capita when capital per capita doubles?
Due to diminishing returns, doubling capital per capita results in less than a doubling of output per capita.
What is growth accounting, and why is it used?
Growth accounting is a method to decompose GDP growth into contributions from capital, labour, and total factor productivity (TFP). It helps identify sources of economic growth and the impact of technological progress.
What is the growth accounting equation?
The growth accounting equation is:
ΔY/Y = ΔA/A + αΔK/K + (1−α)ΔN/N
where:
ΔY/Y = output growth,
ΔA/A = TFP growth,
α and 1−α = shares of capital and labour, respectively.
What is Total Factor Productivity (TFP), and how is it measured?
TFP, also known as the Solow residual, captures the portion of output growth not explained by labour or capital increases. It reflects advancements in technology, efficiency, and other productivity factors.
Why is TFP important for long-term growth?
TFP is critical for sustainable growth because it represents improvements in efficiency and technology, allowing for output increases without proportional increases in inputs.
How do capital, labour, and TFP contribute differently to growth?
Capital and labour growth add to output directly but are subject to diminishing returns. TFP growth boosts output without additional inputs, making it essential for long-term growth.
What did growth accounting reveal about East Asian “Tigers”?
In the East Asian growth miracle, growth was driven by rapid increases in capital and labour, with some contribution from TFP, highlighting the role of factor accumulation in high-growth periods.
How did OECD countries and East Asian “Tigers” differ in growth composition?
OECD growth from 1947-73 was balanced with significant TFP, while East Asia’s high growth (1966-1996) was more reliant on capital accumulation, with TFP playing a smaller role.
What were the main forces behind East Asia’s growth?
High investment rates, rapid labour force growth, and moderate TFP improvements characterized East Asia’s growth, which contrasts with OECD reliance on technological advancement.
What factors drive long-run economic growth?
Key drivers include:
- Human capital (education, skills),
- Physical capital (infrastructure, machinery),
- Technology and innovation,
- Institutional quality (property rights, governance).
How does human capital contribute to economic growth?
Human capital improves productivity, enabling workers to use capital more effectively and adapt to technological changes, increasing overall economic output.
