Economic Growth, Capital, Interest, Growth Rates and Discounting

How are real and financial capital related

Financial capital most commonly refers to assets needed by a company to provide goods or services, as measured in terms of money value.

What role does capital play in the macroeconomy in the SR (hint investment and agg D)? LR (output and growth)?

Short-Run - Long-Run - Amount of capital, labor and resources

What is capital? Human capital?

is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses. Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity.

What's wrong with Malthus' law? (Why hasn't it held for developed countries?)

Ignored increases in capital, technological change, population control

What is the role of technology in economic growth?

the output is GDP. The inputs in this example are workforce, human capital, physical capital, and technology.

How does long-run U.S. growth generally compare with Europe? Asia? Africa?

-faster than Europe and Africa, slower than Asia

What is productivity? Why does it matter to economic growth?

Productivity is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other GDP components such as business inventories. Productivity measures may be examined collectively (across the whole economy) or viewed industry by industry to examine trends in labor growth, wage levels and technological improvement.

What is the long-run average rate of growth in real GDP? Real GDP per capita?

-real GDP: 3.2% 1900-2010 -real GDP per capita: 2.5% per year on average since WWII/ 1.9% long run Per capita GDP is a measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries. A rise in per capita GDP signals growth in the economy and tends to translate as an increase in productivity.

Explain the idea (1 sentence) of each of the following theories of economic growth: a) Classical/Malthusian, b) Neo-Classical - Solow Model c) Endogenous or New Growth Theory d) Creative Destruction

Neoclassical - The Solow model believes that a sustained rise in capital investment increases the growth rate only temporarily: because the ratio of capital to labour goes up. However, the marginal product of additional units of capital may decline (there are diminishing returns) and thus an economy moves back to a long-term growth path, with real GDP growing at the same rate as the growth of the workforce plus a factor to reflect improving productivity. A 'steady-state growth path' is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker are constant. Neo-classical economists believe that to raise the trend rate of growth requires an increase in the labour supply + a higher level of productivity of labour and capital. Differences in the pace of technological change between countries are said to explain much of the variation in growth rates that we see. Endogenous - The endogenous growth theory is an economic theory which argues that economic growth is generated from within a system as a direct result of internal processes. More specifically, the theory notes that the enhancement of a nation's human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production. Creative Destruction - the entrepreneur's introduction of radical innovation into the capitalist system that was the real force that sustained long-term economic growth, even as it destroyed the economic value of established enterprises who may have previously enjoyed a degree of monopolistic power.

What is the role of each of the following in economic growth: Political structure, property rights, human capital, capital, savings, education, natural resources, industrial policy, population growth, research and development, taxes, free trade, trickle down economics, government budget deficits

Political structure - Property Rights - Contractual rights, then, are based on property rights and they allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. One example is the employment agreement: a skilled surgeon operates on an ill person and expects to get paid. Failure to pay would constitute a theft of property by the patient; that property being the services provided by the surgeon. In a society with strong property rights and contractual rights, the terms of the patient-surgeon contract will be fulfilled, because the surgeon would have recourse through the court system to extract payment from that individual. Without a legal system that enforces contracts, people would not be likely to enter into contracts for current or future services because of the risk of non-payment. This would make it difficult to transact business and would slow economic growth. Population Growth - However, increasing population is important for the average person only if the rate of income growth exceeds population growth.