Economics // Chapter 7 Content // Economic Growth
NOTES
a country's output is measured by the value of the goods and services it produces, which can increase based on their quantity or quality
NOTES
a major role of the government in promoting economic growth is to ensure that an effective legal system is in place to enforce contracts and to protect property rights, and that the financial system is kept stable
catch-up effect
countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to grow faster than countries with abundant capital
catch-up effect idea
developing countries are able to achieve greater productivity for each unit of capital invested because the have the advantage of using technologies that have already been developed by other countries
diminishing returns to capital
each additional unit of capital provides a smaller increase in output than the previous unit of capital
NOTES
economic growth is closely tied to how well people live; it improves the lives of people of all income levels
NOTES
free trade refers to the ability to buy and sell products with other countries without significant barriers such as tariffs or quotas
investment in human capital
improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity
Rule of 70 limitations
it is fairly accurate for small growth rates, but for larger growth rates (especially above 10%), the Rule of 70 becomes slightly less accurate over time
production function
measures the output that is produced using various combinations of inputs and a fixed level of technology
Rule of 70 formula
number of years to double value = 70 / growth rate
rule of 70
provides an estimate of the number of years for a value to double, and is calculated as 70 divided by the annual growth rate
real GDP per capita
real GDP divided by population. Provides a rough estimate of a country's standard of living
short-run vs. long-run growth
short-run: occurs when an economy makes use of existing, underutilized resources PPF: shift from a point inside the curve to a point along the curve long-run: occurs when an economy finds new resources or finds ways to use existing resources better; the capacity to produce goods and services increases PPF: outwards shift of the whole curve
compouding
the ability of growth to build on previous growth. It allows a value such as GDP to increase significantly over time as income increases on top of previous increases in income
capital-to-labor ratio
the capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages
NOTES
the governments is the single largest consumer of goods and services in the United States
total factor productivity
the portion of output produced that is not explained by the number of inputs used in production
infrastructure
the public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources such as protection of property rights and a stable monetary environment
NOTES
the relationship between the amount of inputs used in production and the amount of output produced is called a production function
real GDP
the total value of final goods and services produced in a country in a year measured using prices in a base year
NOTES
those nations with the most economic freedom have the highest per capita GDP and also the highest growth rates
economic growth
usually measured by the annual percentage change in real GDP, reflecting an improvement in the standard of living