Macro Chapter 7 – Flashcards
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Economic Growth
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Measured by the annual percent change in real GDP Reflecting an improvement in the standard of living implementing laws, improving financial markets, and trading with other nations
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Standard of Living
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real GDP/ population
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Compounding
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Small rates of growth to turn into substantial increases in income over time The ability of growth to build on previous growth Income increases on top of previous increases in income
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Rule of 70
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Approx. number of years it takes for amount to double in value by using rule of 70 70/ growth rate (%) = # of years to amount to double
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Real GDP per capita
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provides estimate of standard of living When it increases the average output per person is increasing = higher standard of living
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Short run growth
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Economy makes use of existing but underutilized resources Common during recovery and recession (inside PPF)
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Long run growth
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Economy finds New Resources or finds ways to use existing resources better (shift in PPF) [
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Production Function
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Converts imports to exports Various combinations of inputs and fixed level of technology Incorporates all factors of production
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Factors of Production
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Land (N) Labor (L) - mental and physical talents of people Human Capital (H) - training and education Physical Capital (K) -used to produce other goods Entreprenuership (A) - technology and ideas
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Production Function Formula
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OUTPUT = A * f( L, K, H, N)
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Productivity
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Extent to which inputs are converted into outputs. Key driver for economic growth When productivity rises so does standard of living worker productivity increases = worker making more per hour
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Ways to increase productivity
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increase access to natural resources improve quality of life increase capital-to- labor ratio Promote innovation and technology (all increase economic growth)
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Investment in human capital
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Skills, knowledge, and quality of workers. The overall quality of worker and their productivity improved quality of workers = higher productivity
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Capital - to - labor ratio
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The capital employed per worker, A high ratio means higher labor productivity and as a result higher wages
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Diminishing returns to capital
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Each additional unit of capital provides a smaller increase in output then previous units of capital
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Catch up effect
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Developing countries are able to achieve greater productivity for each unit of capital invested because advantage of using technologies already developed
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Total factor productivity
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The portion of output produced that is not explained by the number of inputs used in production Factors such as: new discoveries change in countries institution
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Infrastructure
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The public capital of a nation transportation networks, power-genreating plants, transmittion facilities, public education institutions, protection of property rights and dams, and roads
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The Role of government
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Promoting economic growth with an effective legal system Contributes to physical and human capital and technology (infrastructure) Enforcement of contracts Protection of property rights stable financial system Maintaing competitive and free trade markets
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When the government enforces contracts between two parties, it is acting in its role to promote economic growth by:
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ensuring a stable legal system.
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Rocky Gap Furniture employs 10 workers working eight hours each to produce 100 rocking chairs. What is the productivity of these workers?
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1.25 chairs per hour
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If the growth rate in an economy is 2%, its GDP will double in about
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35 years.
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Which of the following resources is an example of infrastructure?
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elementary school
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According to Joseph Schumpeter, what is the driving force behind business cycles
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waves of innovations
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In the absence of copyright and patent laws
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it is difficult for innovators to profit from their efforts.
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Investment in human capital is important because:
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it increases labor productivity.
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If output equals A*(5K + 2L), what is output if A equals 2,000, capital equals 10, and labor equals 100?
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500,000
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Which of the following occurrences is the key explanation for the high economic growth in the United States in the past century?
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technology improvements
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The recent global financial instability:
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slowed down economic growth. harmed standards of living. caused severe credit crunches.
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The higher the productivity the...
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the higher standard of living
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Economic growth is most commonly measured in
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Real GDP per capita
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More demand
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prices increase = demand pull graph shifts right
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Push
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shift lefts when decreasing supply
