macro 9- economic growth

The Index of Economic Freedom incorporates information from 10 categories

(business, trade, fiscal policy, government size, monetary policy, investment, finance, property rights, corruption, and labor) to measure the openness of an economy

Government must provide public capital.

Dams, roads, and bridges Transportation networks Power plants and transmission lines Telecommunications networks Public education facilities

This phenomenon, called the "catch-up" effect, occurs because:

Developing countries can "borrow" technologies from the developed countries to make their inputs more productive while developed countries must innovate to increase growth (i.e., invest in R&D). The "catch-up" effect is subject to diminishing returns to capital

How do you Increase the Quality (and Quantity) of Human Capital?

Education. Training. Healthcare and nutrition women immigrants

The Link between a Nation's Productivity and Its Standard of Living

GDP/POP GDP stands for the REAL output POP represents the population

How do you Promote Technological Advances?

Government policy tools include: government grants to encourage basic research, tax credits for research and development to encourage applied research, and Protection of intellectual property (e.g., patents, copyrights, etc.).

Technological Development:

Helps countries improve the productivity of existing inputs. Not necessarily a new gadget; could be a change in productivity through new innovation that leads to more output with same amount of human and physical capital

Differing views about the impact of limited natural resources on long-run economic growth turn on the answers to three questions:

How large are the supplies of key natural resources? How effective will technology be at finding alternatives to natural resources? Can long-run economic growth continue in the face of resource scarcity?

How do you Increase the Stock of Physical Capital?

Investments in capital respond to incentives Increase saving by households so that funds will be available for investment. Reduce, or eliminate, tax on interest income. Replace Federal income tax with tax on consumption. Reduce annual federal deficits and overall level of debt.

A stable and secure financial system is necessary to:

Maintain purchasing power of the currency. Facilitate transactions. Allow for functioning of credit institutions.

long run growth

Occurs when an economy finds new resources or finds ways to use existing resources better. <The focus of this chapter>

short run growth

Occurs when an economy makes use of existing but underutilized resources. It is common during a recovery from a recession. <The typical focus of macroeconomics>

Factors resulting from economic growth that contribute to the standard of living

Reduced poverty rates. Improved health and longer life expectancies. Greater investment in education and technology

Only in the last century:

Standards of living have risen substantially. Life expectancy has tripled

Health:

Workers who are in good health will be more productive

Economic growth is defined as

an increase in an economy's production capacity or potential GDP

long run growth is shown as

an outward movement of the PPF

after World war II

business began establishing research and development departments that focused strictly on innovation.

The rate of economic growth is the key determinant of

changes in a society's standard of living—which is commonly measured using real GDP per capita

Economic growth is the primary factor in

explaining how well people live (i.e., their standard of living).

growth rate equation

g = (FV / PV)(1/n) - 1 where "n" is number of years, "FV" is the ending value, "PV" is The beginning value, and "g" is The growth rate.

the rule of 72 is better when the

growth rate is above 5%

factors that affect economic growth

human capital, private physical capital, public physical capital, technology and technological innovation, and natural resources

as physical capital per worker rises

in increase in real GDP per worker becomes smaller (physical capital and productivity)

So, because of diminishing returns, at some point

increasing the amount of physical capital per worker no longer produces an economic payoff.

Before World War II,

innovation came primarily from lone inventors and innovators.

Long-run economic growth is sustainable if

it can continue in the face of the limited supply of natural resources and the impact of growth on the environment.

the rule of 70 is better when

its below 5%

Relatively small differences in the growth rate of per-capita real GDP translate into

large differences in the standard of living.

short run growth is shown as a

movement toward a PPF,

Productivity is a measure

of the output per worker and is what drives growth.

Education:

one of the most important ways that a country can increase its human capital is by ensuring that high-quality public education is freely available to all children.

the components of productivity are

physical capital, human capital, technology, and natural resources

domestic savings come from two sources;

private households spending less than they earn or government revenues exceeding noncapital expenditures

Property rights that facilitate exchange are critical. Most countries have mechanisms to:

punish those who violate others' property rights. Enforce contracts between buyers and sellers. Settle legal disputes. Provide motivation and incentives to innovators in the form of patent and copyright laws.

The spending-investment trade-off is a

reduction in current consumption to pay for investment in capital intended to increase future production

Domestic saving is

savings for capital investment that come from within a country.

Convergence theory states

that countries that start out poor will grow faster than rich countries, and eventually converge to the same growth rate as the rich countries.

The only way to consume more and enjoy a higher standard of living is

to increase the amount each person produces.