Macro Practice
policies to promote technological progress:
- patent laws - tax incentives or direct support for private sector in research and development - grants for basic research
"When workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly." This statement
- represents the traditional view of the production process - is an assertion that capital is subject to diminishing returns - is made under the assumption that the quantities of human capital, natural resources, and technology are being held constant.
population growth may affect living standards in 3 different ways:
1. stretching natural resources 2. diluting the capital stock 3. promoting technological progress
In one day Portal Computer Company made 400 laptops with 1200 hours of labor. What was its productivity?
1/3 laptop per hour
Over the past century in the United States, real GDP per person has grown, on average, by about
2% per year
Which of the following best states economists' understanding of the facts concerning the relationship between natural resources and economic growth?
Abundant domestic natural resources may help make a country rich, but even countries with few natural resources can have high standards of living.
production function formula
Y = AF (L, K, H, N)
Foreign direct investment:
a capital investment (ex: a factory) that is owned and operated by a foreign entity
Foreign portfolio investment:
a capital investment financed with foreign money but operated by domestic residents
Other things the same, if a country raises its saving rate, when is productivity growth higher?
as the economy moves toward the long run, but not in the long run.
Technological knowledge refers to
available information on how to produce things
"When workers have a relatively small quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity by a relatively large amount." This statement is consistent with the view that
capital is subject to diminishing returns.
K/L =
capital per worker
Saving means only one thing
consuming less out of a given amount of resources in the present in order to consume more in the future
political instability
creates uncertainty over whether property rights will be protected in the future
Daniel owns a coffee kiosk. All of his employees work 8 hours per day. In 2011, he employed 6 people who produced a total of 912 cups of coffee each day. In 2012, he hired a seventh employee and production increased to 1008 cups of coffee each day. In Daniel's kiosk, productivity
decreased by about 5.3 percent
Human capital includes the skills accumulated in
early childhood programs, grade school, high school, college, and on-the-job training for adults in the labor force
Saving and investment is one way that a government can
encourage growth and, in the long run, raise the economy's standard of living
the patent system
enhances the incentive for individuals and firms to engage in research
countries with inward-oriented policies have generally
failed to create growth
If over a short time a large number of teenagers become old enough to find employment and a much smaller number of people retire, then productivity
falls but real GDP per person rises.
despite its status as one of the richest countries in the world, Japan has
few natural resources
to raise K/L and hence productivity, wages, and living standards, the government can also encourage
foreign direct investment and foreign portfolio investment
In recent decades Americans have increased their purchase of stocks of foreign-based companies. The Americans who have bought these stocks were engaged in
foreign portfolio investment
example of political instability
frequent coups
education
government can increase productivity by promoting education - investment in human capital (H)
Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely
gradually raise the level of real GDP per person
with the amount of capital per worker already so high, additional capital investment
has a relatively small effect on productivity
You bake cookies. One day you double the time you spend, double the number of chocolate chips, flour, eggs, and all your other inputs, and bake twice as many cookies. Your cookie production function
has constant returns to scale
Productivity is higher when the average worker
has more capital (machines, equipment, etc.)
in the long run, the higher saving rate leads to higher level of productivity and income, but not to
higher growth in these variables
Determinants of productivity:
human capital per worker, physical capital per worker, and natural resources per worker
public good
ideas can be shared freely, increasing the productivity of many
examples of inward-oriented policies
imposing tariffs, limits on investment from abroad, and other trade restrictions
If your firm's production function has constant returns to scale and you increase all your inputs by 60%, then your firm's output will
increase by 60%
in per-worker terms, an increase in N/L causes a(n)
increase in Y/L
If there are diminishing returns to capital, then increases in the capital stock
increase output by ever smaller amounts.
example of an opportunity cost of investment in human capital
increased earning potential
Matt is going to college to become a pharmacist. What he learns about existing information
increases human capital but not technological knowledge
According to studies using international data, an increase in the saving rate
increases the growth rate of output for several decades
if workers have little K, giving them more
increases their productivity a lot
if workers already have a lot of K, giving them more
increases their productivity fairly little
reducing consumption =
increasing saving; this extra saving funds the production of investment goods
examples of free trade
inward-oriented policies and outward-oriented policies
what does the production function measure?
it exhibits constant returns to scale
when production curve is linear:
it has a constant measure
when a production curve is circular:
it has a decreasing measure
propriety knowledge
it is known only by the company that discovers it
technological progress is the main reason why
living standards rise over the long run
Rapid population growth
may depress economic prosperity by reducing the amount of capital which each worker has to work with
L =
measures the amount of workers employed; quantity of labor
H =
measures the human capital (skills and training)
N =
measures the natural resources
A =
measures the technological knowledge; variable that reflects the available production of technology
Other things the same, higher population growth reduces the amount of physical capital per worker, but there is some evidence that it
raises the pace of technological progress.
Growth rate measures
rate of advance of the standard of living
A nation's standard of living is best measured by its
real GDP per person
Over the last ten years productivity grew faster in Mapoli than in Romeria while the population and total hours worked remained the same in both countries. It follows that
real GDP per person grew faster in Mapoli than in Romeria.
Y =
real GDP; the quantity of output produced
Which of the following statements is correct? In 2010,
real income per person in the US was about 6 times that in China, real income per person in China was more than 2 times that in India; the typical resident of India had less real income than the typical resident of England
it is easier for a country to grow fast if it starts out
relatively poor
natural resources take two forms:
renewable (forest) nonrenewable (oil)
Country A and country B both increase their capital stock by one unit. Output in country A increases by 12 while output in country B increases by 15. Other things the same, diminishing returns implies that country A is
richer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units.
Accumulating capital requires that society
sacrifice consumption goods in the present.
On a production function, as capital per worker increases, output per worker increases. This increase is
smaller at larger values of capital per worker.
technological knowledge (A)
society's understanding of the best ways to produce goods and services
Level of real GDP per person measures
standard of living.
small amounts of capital investment can
substantially raise workers' productivity
producing human capital requires inputs in the form of
teachers, libraries, and student time
Thomas Malthus's predictions turned out to be wrong due to
technological advances such as those during the Industrial Revolution.
technological knowledge vs. human capital
technological knowledge refers to society's understanding of how the world works; human capital results from the effect people expend to acquire this knowledge
property rights
the ability of people to exercise authority over the resources they own
H/L =
the average worker's human capital
An economy's income is
the economy's output
examples of outward-oriented policies
the elimination of restrictions on trade or foreign investment
The inputs used to produce goods and services (labor, capital, etc.) are called
the factors of production
natural resources (N)
the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
human capital (H)
the knowledge and skills that workers acquire through education, training, and experience
what is productivity?
the output per worker
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
Productivity
the quantity of goods and services produced from each unit of labor input
production function is used to describe
the relationship between the quantity of inputs used in production and the quantity of output from production
when productivity increases:
the standard of living increases
physical capital (K)
the stock of equipment and structures that are used to produce goods and services
investment from abroad is one way for poor countries
to learn the state-of-the-art technologies developed and used in richer countries
according to studies of international data on economic growth, increasing the saving rate can lead
to substantially high growth for a period of several decades
The level of real GDP person and the growth rate of real GDP per person...
vary widely across countries
The level of real GDP person and the growth rate of real GDP per person
vary widely across countries.
If your firm's production function has constant returns to scale, and if you double all your inputs, then your firm's productivity
will not change
If an economy with constant returns to scale were to double its physical capital stock, its available natural resources, and its human capital, but leave the size of the labor force the same, its output and productivity
would increase, but less than double
technological progress means
any advance in knowledge that boosts productivity (allows society to get more output from its resources)
K =
quantity of physical capital/capital; measures the amount of machines employed
A rapid increase in the number of workers, other things the same, is likely in the short term to
raise real GDP, but decrease real GDP per person
In the long run, an increase in the saving rate
raises the levels of both productivity and income.
If WarmWear, a U.S. manufacturer of winter clothing, opens a new factory in Austria, then Austrian GNP increases by less than Austrian GDP, because
GDP includes income earned by foreigners working in Austria.
_________ refers to the idea that it is easier for a country to grow fast and so catch-up if it starts out relatively poor
The catch-up effect
F ( ) =
a function that shows how the inputs are combined to produce output
An increase in a country's population may contribute to the rate of technological progress because
a larger population brings with it more scientists, inventors, and engineers.
human capital raises
a nation's ability to produce goods and services; it is a produced factor of production
common knowledge
after one person uses it, everyone becomes aware of it
inward-oriented policies
aim to raise living standards by avoiding interaction with other countries
When Chile experiences investment from abroad, it experiences, as a result,
an increase in productivity
other things equal, more N allows a country to produce
more Y
Productivity is higher when the average worker has
more human capital (education, skills, etc.)
As technology improves, A rises, so the economy produces
more output from any given combination of inputs
Productivity is the amount of goods and services produced for each hour of a worker's time. It is linked to a
nation's economic policies.
N/L =
natural resources per worker
countries with outward-oriented policies have
often succeeded to create growth
Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then
output in country A increases by less than in country B.
The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called
physical capital
Investment in
physical capital, like investment in human capital, has an opportunity cost.
studies of international data on economic growth confirm this catch-up effect: controlling for other variables
poor countries tend to grow at faster rates than rich countries
Apple founder Steve Jobs received patents on many of his ideas. While the patents existed, his ideas were
private goods and propriety knowledge
Students can be viewed as "workers" who have the important job of
producing the human capital that will be used in future production
if every factor in the function doubled,
production would also double
if a single factor in the function doubled,
production would increase, but not double
The one variable that stands out as the most significant explanation of large variations in living standards around the world is
productivity
Y/L =
productivity (output per worker)
Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then
productivity rises and output falls
if the function increases/decrease by the factor x:
productivity variable and all other variables are divided by L
outward-oriented policies
promote integration with the world economy
the patent gives the inventor a property right over her invention, turning her new idea from a
public good to a private good
