ECON 2105 - Ch. 7
Why is economic growth important?
1. reduce poverty rates 2. improved health and longer life expectancies 3. greater investment in education and technology
Measuring Real GDP Growth
Bureau of Economic Analysis (BEA) provides quarterly reports on changes in US GDP: -reflect annualized rate -year-over-year rate
Year-Over-Year Rate
Compares GDP at the current quarter with the previous year; provides trend in growth for the entire year
Catch-Up Effect
Describes why developing countries may initially grow faster than developed countries. Developing countries can use existing technologies to make their inputs more productive, while developed countries must innovate to increase growth. Subject to diminishing returns to capital.
Role of the Government
Government can influence the economic growth in a country by: -contributing to physical capital, human capital, and technology -enforcing contracts, protecting property rights, and maintaining a stable financial system. -promoting free and competitive markets
Factors of Production
Land and Natural Resources (N) Labor (L) Human Capital (H) Physical Capital (K) Entrepreneurship (A) Ideas
Production Function
Measures how an economy turns inputs into outputs using existing technology Shows the output that is produced using different combinations of inputs combined with existing technology Classical form: Output = f(L,K) Incorporating all factors of production: Output = A x f(L,K,H,N)
Total Factor Productivity
Measures the portion of output that in not explained y the amount of inputs used. It captures the external effects influencing productivity of all inputs.
Long-Run Growth
Occurs when an economy finds new resources or finds ways to use existing resources better
Short-Run Growth
Occurs when an economy makes use of existing but underutilized resources. It is common during recovery from a recession
Real GDP per Capita
Real GDP divided by population
Real GDP
Total output in a year measured in constant-year prices
Power of Compounding
allows small rates of growth to turn into substantial increases in income over time.
Which of the following is NOT an effective tool used by government to promote economic growth? a. a strong legal system to enforce contracts b. trade barriers to protect domestic industries c. a stable currency and financial system d. economic freedom and competitive markets e. investment in infrastructure and human capital
b. trade barriers to protect domestic industries
If a country grows at 3% per year, approximately how many years will it take for its GDP to double? a. 3 years b. 10 years c. 23 years d. 33 years e. 70 years
c. 23 years
Rule of 70
can be used to estimate the number of years for a value to double ex: 10% annual gain 70/10 = 7 years to double value
What is the single most important factor influencing economic growth for an economy? a. population growth b. government regulation of big business c. reducing the capital-to-labor ratio d. increased productivity e. greater natural resources
d. increased productivity
Productivity
measures how effectively inputs are converted to outputs
Capital-to-Labor Ratio
measures the mount of physical capital available per worker. A higher ratio equals greater labor productivity
Annualized Rate
quarterly change in GDP is multiplied by 4; highlights seasonal fluctuations in growth
Labor productivity
ratio of the output of goods and services to the labor hours used to produce that output
Economic Growth
the primary factor in explaining how well people live, their standard of living *most commonly measured by Real GDP and Real GDP Per Capita