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