chapter 7
Production function output formula
A * f(L, K, H, N)
Economic growth
a change in a country's output or income that leads to an improvement in the standard of living
What is economic is measured by what?
a nation's ability to increase real GDP and real GDP per capita
Productivity
ability to turn a fixed amount of inputs (factors of production) into more outputs (goods and services)
Capital-to-labor ratio
capital employed per worker, a higher ratio means higher labor productivity and, as a result, higher wages
Catch-up effect
countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to growth faster than countries with abundant capital
Diminishing returns to capital
each additional unit of capital provides a smaller increase in output than the previous unit of capital
What is the most important factor influencing a country's standard of living?
economic growth
What does the government do as a guarantor of economic growth?
enforcement of contracts, protection of property rights, stable financial system, promoting free and competitive markets
Technology
funding research via grants and the establishment of major government research labs
Ways to increase productivity
increase access to natural resources, improving quality of labor (human capital), increasing the capital-to-labor ratio, promoting innovation and technology
Investment in human capital
investments such as education and on-the-job training that improves the productivity of labor
What are the factors of production
land, labor, capital, and entrepreneurial ability
Total factor productivity
measurement of productivity taking into account all other factors beyond the quantity and quality of inputs that could influence production
Production function
measures the output that is produced using various combinations of inputs and a fixed level of technology
Formula for rule of 70
number of years = 70 / growth rate
Short-run growth
occurs when an economy makes better use of existing or undetutilized resources, and is shown as a movement from inside a PPF toward the PPF
Human capital
providing subsidized public college education, financial aid grants, and loans
Real GDP per capita
real GDP / population, provides a rough estimate of a country's standard of living
long-run growth
requires an expansion of production capacity through an increase in resources and/or technology and is shown by an expansion of the PPF
The rule of 70
simple tool used to estimate the number of years it takes for a value to a double give na constant growth rate
What are the variables in the PPF output formula?
technology * a function of available labor (L), physical capital (K), human capital (H), and land and natural resources (N)
Physical capital
the building and maintenance o the country's public capital (infrastructure), which includes roads, bridges, airports, power plants, and telecommunications networks
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 tangible resources, such as protection of property rights and a stable monetary environment
Real GDP
the total value of final goods and services produced in a country in a year measured using prices in a base year
Why do you need to use real values?
using real values allows a country to compare growth from year to year without having to take into account the effects of inflation