We want to separate changes in the quantity of goods and services from the effects of a rising price level
Why do we focus and real GDP per capita?
We want to isolate the effect of changes in the population
What's the difference between changes in levels and rate of change?
Rate of change= economic growth over a period of time
level of change= just the growth
Rule of 70
tells us the time it takes a variable that grows gradually over time to double
What's the equation for the rule of 70?
Number of years for variable to double=
Annual growth rate of varible
Solve: how many year will it take or real GDP per capita to grow if the RGDP per captia grows at 1% per year? 2% per year?
--------=70 yrs to double
-------= 35 yrs to double
How is economic growth measure?
Using real GDP per capita
Sustained economic growth occurs only______
when the amount of output produced by the average worker increases steadily
What's Labor of productivity often referred to?
What's labor of productivity?
output per worker
How do we calculate productivity?
# of people working
What's the result in increased output per worker?
a increase in real GDP per capita
What are the three main reasons why there is growth in productivity?
physical capital, human capital, and technological progress
What's physical capital?
Human made resources
ex. buildings and machines
What's Human Capital
The improvement in labor created by the education and knowledge embodied in the workforce
What's the difference between physical and human capital?
-Physical Capital (K) : the stock of equipment and structures used to produce g&s
-Human capital (H):
the knowledge and skills workers acquire through education, training, and experience
What is suggested to have a more important determinant of growth of growth increaces than physical capital?
What's probably the most important driver of productivity growth?
What's technological progress
an advance in the technical means of the production of good and service
Aggregate production function (production function)
- shows the total output the economy can produce with different quantities of labor,given constant amounts of other resources and the current state of technology
-upward slope shows an increase in # of people working will increase quantity of output
-flattens as we go to the right. declining is the result of diminishing returns to labor. Rise is smaller with each successive worker.
What does estimated aggregate production function exhibit?
diminishing returns to phsyical capital
What's diminishing returns to physical capital?
When, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity
The more physical capital per worker =
more output per worker
What does diminishing returns to physical capital mean?
Holding the amount of human capital per worker and the technology fixed, each successive increase in the amount of physical capital per worker results in a smaller increase in real GDP per worker
What's per capita RGDP?
the quantity of RGDP that each citizen would get incomes were distributed equally
What's economic growth
Percentage changes in GDP
Per capita RGDP growth depends on:
1) Nominal GDP (NomGDP↑=RGDP↑) (positive)
2)Inflation Rate (negative) (△P↑=RGDP↓)
3)Population Growth (negative)
What are the determinants of RGDP?
2) resource growth
a)Growth in Labor
b)Growth in capital
Give equations of Economic Growth
Y= per captia RGDP
What can promote Economic Growth?
1)Technical progress-productivity growth
2)Increases in resources
What's the Aggregate Production Function Formula?
True or False: Natural resources are less important determinant of productivity today in economic growth than capital
Why do growth rates differ?
Poor countries are labor abundant & capital scarce
Rich countries are vice versa
What does Growth Accounting do?
It Estimates the contribution of each major factor in the aggregate production function to economic growth
What does growth accounting allow us to calculate?
It allows us to calculate the effects of greater physical & human capital on economic growth
What's total factor Productivity?
The amount of output that can be achieved with a given amount of factor inputs
What is crucial for economic growth?
What do countries have the are abundant in natural resources?
higher GDP (but not per capita)
Economies with rapid growth tend to:
1)Add psyical Captial
2) Increase Human Capital
3) Experience rapid technology progress
Were does investment money come from?
How is investment spending paid for
from either savings from domestic households or from foreign households
What does research and development mean (R&D)?
spending to create & implement new technologies
How can the government enhance economic growth?
through subsidies to factors that enhance growth
How can government hinder growth?
By creating an environment that hinders growth
What are the 4 main channels that government policies use to increase the economic growth rate?
1)Government subsides to infrastructure
2)Government subsidies to education
3)Government subsides to R&D
3)Maintaining a well=function financial system
What are subsidies
monetary grants given to prosucers or consumers to encourage certain behaviors
buildings, roads, etc. structures needed for society
What does government pay for which help human capital
What is the East Asia Miracle?
E-A has has high long run growth rates
-high saving rates (phys. capital)
-Good education (human capital)
-Technical progress (rapid)
What is the convergence hypothesis?
Differences in RGDP per capita among countries tend to narrow over time because countries that start with lower RGDP per capita tend to have higher growth rates
Why has Latin America's RGDP per capita stagnated?
-savings have eroded due to high inflation, bank failures, etc.
-Education have been emphasized
What does sustainable long-run economic growth mean?
Long-run growth that can continue in the face of the limited supply of natural resources and the impact of growth on the environment
true or false: are air and water qualities in advanced countries better than it was before?
ex. London fog L.A. smog
What is the biggest global environment issue?
the impact of fossil-fuel consumption on the world's climate.
What's the problem with emerging countries and environment issues?
emerging countries start to consume more energy and emit more carbon dioxide
Is it possible to continue L-R economic growth while curbing the emissions of greenhouse gases?
It should be
True or false: a large reduction in greenhouse gas emission over the next few decades would curb the long-term rise in RGDP per capita
false: a large reduction in greenhouse gas emission over the next few decades would only modestly dent the long-term rise in RGDP per capita
what's an externality?
an economic decision that has an effect on someone who was not part of the decision making process (can be positive or negative)
How should the government deal with climate change (according to economists)?
Use market based incentives or a trade system
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