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Japan since WWII

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most dramatic example of long-run economic growth; sustained increase in output per capita

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key statistic to track economic growth

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real GDP per capita; real GDP divided by population size

question

why GDP?

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measures total value of an economy's production of final goods and services as well as the income earned in that economy in a given year

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why real GDP?

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separates changes in the quantity of goods and services from the effects of a rising price level

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why real GDP per capita?

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isolates the effects of changes in the population; increase in population lowers average standard of living unless matched by increase in real GDP

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using growth in real GDP per capita

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should not be a policy goal in and of itself but useful summary measure of a country's economic progress over time

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Research and development (R&D):

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spending to create and implement new technologies Thomas Edison: inventor of light bulb.... And research and development.

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When considering economic growth, many policy makers focus on real GDP per capita since it takes into account the potentially distorting effects of

answer

population change

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Any large, sustainable increase in real GDP must be due to steadily increasing __________.

answer

labor productivity

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The purpose of growth accounting is to:

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estimate the contribution each component of the aggregate production function makes to overall economic growth.

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income of typical family related to per capita income

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normally grows more or less in proportion; 1% increase in real GDP per capita = 1% increase in income of median family; percentage of future real GDP per capita equals percentage purchasing power compared to future family

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typical course of long-run growth

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gradual process in which real GDP per capita grows a few percent a year; US average 1.9% a year

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Rule of 70

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mathematical formula that tells how long it takes real GDP per capita, or any other variable that grows gradually over time, to double; 70/annual growth rate of variable; can only be applied to positive growth rate

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important constraints on future growth

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low education levels, inadequate infrastructure (India)

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long-run economic growth depends almost entirely on

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rising productivity

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sustained economic growth occurs only when

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the amount of output produced by the average worker increases steadily

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WHY GROWTH RATES DIFFER

answer

Savings and investment spending Education Research and development

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Economist Robert Gordon argues that new information technologies won't create as much growth as the five big innovations:

answer

Electricity The internal combustion engine Running water and central heating Modern chemistry Mass communication, movies, and telephones

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labor productivity

answer

output per worker or per hour; real GDP divided by the number of people working

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long-run vs. short-run labor productivity

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for short periods of time, economy can have a burst of growth in output per capita by putting higher percentage to work (women during WWII); in long-run, rate of employment growth close to rate of population growth

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overall connection between real GDP per capita and population growth

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real GDP can grow because of population growth but any large increase in real GDP per capita must be the result of increased output per worker

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three main reasons average US worker produces far more than before

answer

more physical capital, more human capital, technological progress

question

physical capital

answer

human-made resources (buildings, machines); increases productivity

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example

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adult literacy increase the number of college graduates increase a doctors knowledge about a new cancer treatment more people graduate from culinary school

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human capital

answer

improvement in labor created by the education and knowledge embodied in the workforce

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example

answer

company cars company computers

question

growth accounting

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estimates contribution of each major factor in the aggregate production function to economic growth; suggests education and its effect on productivity is even more important than increases in physical capital

question

example

answer

new distribution techniques a new cancer treatment

question

technological progress

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advance in the technical means of the production of goods and services; most important driver of productivity growth

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Infrastructure

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physical capital, such as roads, power lines, ports, information networks, and other parts of an economy, that provides the underpinnings, or foundation, for economic activity

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aggregate production function

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shows how productivity depends on the quantities of physical capital per worker and human capital per worker and state of technology; these factors increase over time and function disentangles effects of them on overall productivity

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is an input

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amount of oil discover in texas unskilled workers from latin America recent graduate with an engineering degree upgrade computers for mikey's motor

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is not an input

answer

contribution to SSI bonds issue by an automaker profit of a large investment company decrease property taxes

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GDP per worker equation

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T x (physical capital per worker)^0.4 x (human capital per worker)^0.6; Brookings Institution assumed each year of education increased workers' human capital by 7%

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China grew faster than India because

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its higher levels of investment spending raised its level of physical capital per worker faster, faster technological progress

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diminishing returns to physical capital

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when human capital per worker and state of technology are fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity in the aggregate production function

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diminishing returns to physical capital imply a relationship between

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physical capital per worker and output per worker

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how to estimate effects of technological progress

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what is left over after the effects of physical and human capital

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aggregate production functions shifts up when

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it is possible to produce more output for a given amount of physical capital per worker

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total factor productivity

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amount of output that can be produced with a given amount of factor inputs (physical capital, human capital, labor); increases are central to economic growth

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Bureau of Labor Statistics

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estimates the growth rate of both labor productivity and total factor productivity for nonfarm business in US

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effect of growth rates

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even small differences in growth rates have large consequences over the long-run

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reasons for difference in national growth rates

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increasing stock of physical capital more rapidly through higher rates of investment spending; add different amounts to stock of physical capital because of different rates of savings and investment spending; rate of growth in education level; R & D

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investment spending must be paid for either

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out of savings from domestic households or by savings from foreign households (inflow of foreign capital) through financial markets

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government impacts on long-term economic growth

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affect growth directly through subsidies to factors that enhance growth; create environment that hinders or fosters growth; protection of property rights; political stability and good governance

question

government subsidies

answer

infrastructure to provide a foundation for economic activity; basic public health measures; education; research; R&D; well-regulated and well-functioning financial system

question

maintaining a well-functioning financial system

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making high rates of investment possible; amount of savings and ability of economy to direct savings into productive investment spending depends on it

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importance of trust in financial system

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assure depositors of protection from loss so trust banks and place savings in banks instead of hoarding where it can't become productive investment spending

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property rights

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rights of owners of valuable items to dispose of them as they choose

question

intellectual property rights

answer

rights of innovator to accrue rewards of innovation; necessary to encourage innovation

question

patent

answer

government-created temporary monopoly given to innovator for use or sale of innovation; incentive to invent, encourages competition

question

excessive government intervention can impede economic growth when

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large parts of economy supported by government subsidies, protected form imports, subject to unnecessary monopolization cause lack of incentives and competition

question

example of negative excessive government intervention

answer

Latin America, Argentina's slow progress interrupted by repeated setbacks

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savings rate

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percentage of GDP saved nationally in a year

question

Which of the following best describes the idea of economic convergence?

answer

Lower GDP per capita countries will catch up with higher GDP per capita countries.

question

convergence hypothesis

answer

differences in real GDP per capita among countries tend to narrow over time because countries that start with lower real GDP per capita tend to have higher growth rates; negative relationship between real GDP per capita annual growth rate and real GDP per capita

question

conditional convergence

answer

other things not equal, poorer countries still tend to have higher growth rates

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convergence among wealthy countries

answer

real GDP per capita in Western Europe, North America, and some of Asia more similar but gap between them and rest of world growing

question

sustainable long-run economic growth

answer

long-run growth that can continue in the face of the limited supply of natural resources and impact of growth on the environment

question

negative externality

answer

cost that individuals or firms impose on others without having to offer compensation; pollution; no incentive to avoid without government intervention

question

Identify whether the following statements about climate change and economic growth are true or false by dragging and dropping the relevant word into the bins provided.

answer

Poorer countries have historically been responsible for the bulk of world carbon emissions because of poor technology and environmental regulations. False Poorer countries have historically been responsible for the bulk of world carbon emissions because of poor technology and environmental regulations. True Tackling climate change issues is likely to only modestly dent long-term economic growth. True Carbon emissions are negatively correlated with economic growth. False

question

Countries' real GDP per capita growth rates differ largely due to disparities in the rates at which they accumulate ________________________, as well as the rate of _______________ change.

answer

human and physical capital / technological

question

In many countries growth has been achieved through high rates of __________ and ______________ spending.

answer

saving and investment

question

___________________ , which is/are a key contributor to economic growth, generally requires significant investment in __________________.

answer

Technological progress ; research and development

question

Identify whether the statements below are true or false

answer

Long run economic growth is unlikely to be sustainable because of finite natural resources. false In the modern economy, countries that possess few domestic natural resources essentially have no chance to develop economically. false Finding alternatives to natural resources will be very important to long-term economic growth. true In the modern economy, human and physical capital are generally less important in productivity than natural resources. false In the 19th century, countries with the highest per capital GDP were nearly always abundant in minerals and productive farming land. true

question

Label the following statements as True or False.

answer

1. All else equal, countries with more natural resources have a higher GDP per capita than those with few natural resources. true 2. Over the past two hundred years, improvements in productivity have offset lost productivity reduction due to less land being available. true 3. The key to prosperity in the 20th century is an economy rich in natural resources. false 4. Human and physical capital are only beneficial to an economy when there is an abundance of natural resources in the economy. false

Chapter 9: Long-Run Economic Growth – Flashcards

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