macro test three
life expectancy
Another reason we care about GDP per capita is poverty brings lower life expectancy. ONe way to measure health of a nation is to look at average life expectancy at birth. What they found was that non income based measure of standard of living also correlates strongly with GDP per capita.
demographic transition
Around the time of the Malthusian cycle or a little but after fertility declined. This is a process that has both economic and social causes. Economists typically emphasize the importance of a transition of agriculture and rural areas to industry and and cities as a major cause of this. Many historians and economists view this as the central ingredient to modern growth because its enabled economies that experienced reduced fertility to break away from the multhasian cycle.
implication of solow model
Based on K/Y= s/d which means that throughout there is a constant ratio of physical capital stock to GDP. Therefore the implication of this model for sustained growth is that the ratio of the physical capital stock to the GDP should be constant as the economy grows.
extractive economic institutions
there are two possible implications of this: 1) by creating insecure property rights and limiting legal backup, they make entrepreneurship less profitable and shift the return to entrepreneurship schedule to the left 2)by erecting entry barriers, they make entry more costly and shift the opportunity cost schedule upwards. 1)These do not protect property rights, 2) do not enforce private contracts 3)interfere with the workings of markets 4) restrict entry into new lines of business and occupations
economic institutions
these are aspects of societies rules that concern economic transactions. besides the protection of property rights, these include such things as the functioning and impartiality of the judicial system, the financial agreements that determine how individuals and businesses can borrow money, and the regulations that shape how costly it is to enter into a new line of business of new occupation.
political institutions
these determines who holds the political power and what type of constraints exsist on the exercise of power. Extractive economic institutions tend to be supported by certain types of political institutions which concentrates political power in the hands of the political elite and puts little constraint on how political power can be used.
savings rate
this corresponds to the fraction of income that is saved. We can compute this by (dividing total savings rate by GDP)
physical capital accumulation
this equation is K now= (1+d) * K last year + I This is not only useful for solows model, infact it is one of the key equations that economists use t compute the actual value of physical capital stock in practice , such as national income accounts.
exponential growth
this happens to the economy/GDP because new growth builds on old growth and the effect compounds. This implies that relatively modest differences in growth rates translates into large differences in the level of quantity after many years of growing. This is defined as the process by which quantity grows at an approximately constant growth rate
growth rate
this is a change in quantity (like real GDP per capita) between two dates, relative to the baseline (beginning of the period) quantity. Equation: growth t, t+1= (Yt+1 + Yt)/Yt -t= baseline year -t+1= one year after baseline year
aggregate production function
this is a function we refer to when we study a single firm, our focus is not specific commodities, such as tshirt or i-phones it is as of GDP. This measures why productivity changes from country to country.
physical capital
this is any good including machine, equipment, and building that is used for production. All the aggregates of production for a specific thing may be different but we can add them all together to form physical capital stock. This is a single measure and obtain of the economy using their dollar value. Workers will become more productive when a company has more physical stock because each worker is enabled to work more because there is more or better equipment and structures.
fertility
this is defined as the number of children per adult or per woman of childbearing age- would adjust so income would always remain close to the substinence level. he assumed that real GDP per capita would not grow as fast as the population would concluding that the increased population would push real GDP per capita down towards or possibly below the sunnstinence level. This would then cause famines and wars to start which would reduce the population and then with a given level of aggregate income a lower population would cause real GDP to increase again. This cycle is known as Malthusian cycle.
total efficiency units of labor
this is defined as the product of the total number of workers and the average human capital (efficiency ) of workers. We find the equation H= L * h. --> H = total efficiency of labor --> L= the product of the total number of workers in the economy --> h= average efficiency of labor or human capital of workers. This equation implies that the total efficicency units of labor in the economy can be increased either if more workers take part in the production process.
fundamental causes of prosperity
this is defined as the root causes of the difference in proximate causes of proximaty. Fundamental causes are known as geography, culture, and institutions. Proximate causes are known as physical capital, technology, and human capital.
physical capital stock
this is denoted as K in the aggregate production function equation. This represents the value of all equipment (example: machines, cars, planes, and computers) and structures (like buildings) of the economy. This can be increased by investment, which is a process also known as physical capital accumulation. This in turn also increases GDP.
GDP per worker
this is found by: technology * (capital per worker)^1/3 ( ( humna capital per worker)^2/3. This equation demonstrates that productivity is determined by three ingredients: technology, physical capital, and human capital.
efficiency of production
this is the ability of society to produce maximum amount of output at a given cost or for given levels of factors of production and knowledge. This is included in the definition of technology because when there is an increase in this we see a rightward shift of the aggregate production function. We include this because it captures the differences in how much output can generate with a given amount of inputs.
subsistence level
this is the level of income per capita below which an individual can not easily survive. Regardless of an exact level, there exists a minimum level of income per person that is necessary for an individuals survival and substance. When the income falls below this level much of the population will starve.
creative destruction
this is the process by which entrprenuers create new entrants with innovatibe technologies that destroy the relatively inefficient incumbent.
technological change
this is the process of new technologies and new goods and services being invented, introduced, and used in the economy, enabling the economy to achieve a higher level of real GDP for given levels of its factors of production, physical capital stock, and total efficiency units of labor. The rate of change is exponential because improvements in technology take place at approximately constant rate rather than by constant increments. The exponential nature of technology knowledge ensures that innovations improve our productive capacity in real GDP not by a constant amount but by a constant proportional amount - that is, by a constant percentage.
institutions
this is the third potential fundamental cause for differences in prosperity. It is defined as the formal and informal rules that govern the organization of society, including its laws and regulations. Douglass North said "institutions are the rules of the game in a society or, more formally, are the humanly advised constraints that shape human interaction". This definition helps to capture the three important elements that help to define institutions: 1)they are determined by individuals as members of society 2) they place constraints on behaviors 3)they shape behavior by determining incentives
sustained growth
this is when a country experiences relatively steady growth over a long period of time.
reversal fortune
this is when former colonies that were poor in the 1500 are now rich, while former colonies that were rich in 1500 are relatively poor today. What happened is the poor settlers in the temperate areas of north america, australia, and argentina developed inclusive economic institutions due to low settler mortality rates.
steady state equilibrium
this is when physical capital stock this year is equal to physical capital stock from last year. This equation is K now= K last year= K. when we combine this equation with aggregate production function we find that I = d * K. because for physical capital stock to be unnchanged over the years we need to have investment equal to the fraction d of capital stock. This means that in order for the physical capital stock to remain the same over time we need the amount of investment to equal the depreciated value of the capital stock. (d * K) does not shift due to changes in technology.
institutions hypothesis
this mainatins that the differences in the way that humans have chosen to organize their societies- differences that shape the incentives that individuals and businesses in the society face - are the root of the differences in their relative prosperity. This relies on the following chain of reasoning: 1) different societies typically have different institutions 2) these different institutions create different types of incentives 3) the incentives help to determine the degree to which societies accumulate the factors of production and adopt new technology
foreign aid
this may not solve the wold poverty. The amount of foriegn aid is not large enough to lead to sizable increases in physical or capital and educational attainment and more importantly does not impact technology or the efficiency of production. n practice much of foreign aid does not get invested in education or new technologies but is captured by corrupt government officials. mnay studies show that only 10 to 15% of foreign aid actually reaches its intended destination.
political creative destruction
this predicts that economic growth destabilizes existing regime and reduces political power. Therefore, rulers such as kimJon Un of north Korea use extractive economic institutions that help maintain power.
economic growth
this refers to an increase in real GDP per capita of the economy.
technology
this refers to set of devices and practices that determine how efficiently an economy uses its labor and capital. In conclusion an economy who uses better technology uses its labor and capital more efficiently thus achieving higher productivity. This denoted as A in the aggregate production function but note that A is not a factor of production because it does not correspond to an input that the producer can purchase in the marketplace.
culture hypothesis
this says that different societies respond differrently to incentives because of specific shared experiences, religious teachings, the strength of family ties, or unspoken social norms. Culture is viewed as the key determinant of the values, preferences, and beliefs of individuals and societies, and these differences play a key role in shaping economic performance. max Weber argued that origins of industrialization in western Europe could be traced back to protestenism. This was the most famous link between culture and economic development.
inclusive economic institutions
this terminology stems from the fact that such insttitutions are often shaped by those who control political power to extract resources from the rest of society. These allowed th eindustrial revolution, with all its social and economic processes, to occur in england in the late 18th century and in the US in the 19th century
industrial revolution
this was a gradual process rather than a short period of rapid disruption. This is when many new methods and machines of production started in britain and textile manufacturing and thereafter spreading into other sectors. the countries that are rich today are the ones that benefited the most from this.
new national accounting equation.
when considering K we see that if we look at a closed economy the national accounting identity states that Y= I + C, because there are no exports and imports and and no government intervention. Since investment comes directly from aggregate savings or in other words then I=S. Basically this says that all resources households try to save will go directly to firms for investments. So a nationa that has a high savings rate will increase its physical capital stock rapidly and by the aggregate production function this means it will increase its GDP as well.
measuring standard of living
when measuring this across different countries we must consider, life expectancy, how much people make per day, and Human development index
human capital
when usign this in reference to a steady state equilibrium a country with better human capital will shift the aggregate production function to the right. This implies that higher human capital leads to both higher steady state equilibrium physical capital stock and higher real GDP in the economy.
Real GDP
when we adjust economic variable such as GDP to correct for changes in prices over time.
aggregate production function
There are some similarities to the production function for a specific firm. in fact just like the production function this will show that GDP is increasing in both physical capital and labor but differently. This is subject to the law of diminishing marginal product. this states that the marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production. basically in both graphs as one input increases and the other remains constant the graph will slowly dimish/not increase by as much as before.
geography hypothesis
This claims that differences in geography, climate, ecology, determine the large differences in prosperity around the world. According to this hypothesis some countries have highly unfavorable geographical, climatic, and ecological circumstance that are outside of their control. Philosopher Montesquieu argued that climate was the key determinant of work effort and thus prosperity. Jeffery Sachs an environmentalist argues that many parts of the world are disadvantaged economically because of infectious diseases, such as malaria which is spread very easily in those environments.
human development index
This combines GDP per capita life expectancy and measures of education to more holistically measure the standard of living. This combines information on GDP per capita life expectancy, average years of schooling for those above 25, and the enrollment of children in school. What they found was that countries with higher PPP adjusted GDP per capita tend to have higher levels of this index.
GDP per capita
This is GDP/ total population. This is a measure of GDP per person. When converting one countries income to anothers we need to make them comparable. You mutiply that countries GDP per capita and then divide it by money/peso exchange rate.
catch-up growth
This is a type of GDP growth that happens when nations are catching up with the income and technology leader of the world, which is usually the US. Countries partaking in this benefit most from increasing their savings, efficiency units of labor, and efficiency of production. It is very important in practice but it is far from automatic
productivity
This is the value of goods and services each worker produces for each hour of work. This is the main reason why GDP per capita and GDP per worker varies across each country, because productivity varies. This and GDP per worker are very similar.
GDP per worker
This is used because when we didvide by total population we are including elderly, and children and others who do not work so this is a more accurate representation. The equation is: = (GDP/ number of people in employment). This measure gives us a better idea of how much each worker produce on average while excluding those who do not work. Every country will have higher GDP per worker vs GDP per capita.
Malthusian cycle
This is when increased aggregate income would raise real GDP per capita above substinence, fueling population growth, which in turn would put pressure on resources and reduce real GDP per capita back to its initial value or sometimes a lower value. This pattern subsequently corrects the increase in population through reduced fertility and higher mortality, often due to famines.
moores law
This law implies that computer processor power should double approximately every two years. So far this seemed to be born out of development in computer technology. The number of pixels in digital cameras and RAM storage capacity has also doubled every two years or so, while power consumption of computer nodes and hard disk storage appears to have been approximately halved every two years or so.
one dollar a day per person poverty line
This measures absolute poverty in poor countries. It corresponds to living on less than 1.90 per person per day (IN US dollars). GDP per capita is a good indicator of showing which countries have populations suffering from extreme poverty. In a graph it was found that countires with less than 1.90 per day were higher among countries with lower GDP per capita.
cobb douglas function
Y = A * F(K,H)= A * K^1/3 * H ^2/3. Since these coeeficients are raised to 1/3 and 2/3 this ensures that we maintain constant returns to scale. That is increasing K and H by one would increase Y by one as well. This is alos accurate in the fact that roughly 2/3 of the countries national income goes to labor and one third to physical capital. When we divide this equation by (1/L) which is the total number of workers it gets rewritten to: --> y= A * (K/L)^1/3 * h ^2/3.
aggregate production
Y= A * F (K, H) --> Y= GDP K= physical capital stock of the nation F= shows the relationship between physical capital, labor, and GDP. IN particular GDP is generated through a combination of physical capital and the efficiency units of labor. H= the efficiency units of labor the economy uses in production A= this is the index of technology. As A increases the economy produces more GDP with the same level of capital stock and total efficiency units of labor
knowledge
an important part of this is embodied in the physical capital stock of firms: the computers that firms are using are part of the physical capital stock of the economy. Also advancements in technology directly increase the number of tasks we can perform and the speed at which we can accomplish them.
savings rate
consider two countries who have the same of everything besides their savings rate.The economy with the higher savings rate will ahve a steady state equilibrium to the right and above the original one. The corresponds to greater physical capital stock and therefore greater GDP. AN economy can not continually save because they can not have a savings rate above 100%. This is referred to as Y max. This implies that sustained growth is not possible just by increasing the savings rate.
samuel huntington
he coined the term "clash of civilizations" to capture what he thought would be th defining conflict of the twenty first century which is the conflict between the west and Islam. More broadly he says that culture helps to shape prosperity.
max weber
he proposed the most famous view beteen the link of culture and economic development. He said that origins of industrialization in western Europe could be traced back to protestenism. In his view, Protestant worldview was crucial to the development of a market economy and economic growth because it encouraged hard work and savings and thus investment.
productivity differences
human capital, physical capital, technology.
research and development
most of the time this is how advancements in technology happen. This involves a wide range of activities like research on new scientific ideas in universities and private labs, research directed at finding new ways of applying science to production on the factory floor, and development activities geared at commercializing exsisiting knowledge and products. This is a major activity in the US economy. it creates 2.81 percent of total GDP
growth rate
one way to calculate this is to use the equation (1 + g) ^(The number of years its been). G is the growth rate from the original year. This gives you approximation the average annual growth rate.
proximate causes of prosperity
physical capital, human capital, and technology are only proximate causes of economic performance. This links high levels of prosperity to high levels of inputs of production but without providing an explanation for why those levels of inputs are so high.
private property rights
south korea has these and they are well enforced. These mean that citizens can hold property like businesses, houses, cars, and many other things without fearing that the government or anyone else will arbitrailiy take it away from them.
why is the average American so much richer than the average Indian
-differences in total efficiency, units of labor
factors that increase GDP
-greater human capital -a larger stock of physical capital - better technology. Since total number of workers is constant this also correlates to an increase in productivity.
what impacts individuals choices to save
-interest rates (how much they think they will get on their savings) -expectations of future income growth -and maybe taxes
three building blocks of Solows model
1) aggregate production function--> links real GDP to physical capital and human capital(total efficiency units of labor), and technology. 2)equation for physical capital accumulation. Physical capital is subject to depreciation meaning it goes through wear and tear, as a result some of the value will be lost. We get the equation: K now= (1-d) * K last year+ I 3)savings by households. The investment in the economy will be I= s * Y --> Using all these variables we can look at the aggregate production function as I= s * Y= s * A * F(K,H)
ways to reduce international poverty
1) international trade--> this can be beneficial to all countries that partake in it. Even though it does create some winners and losers, the overall change from this is generally positive and significant. 2) improve the knowledge and technology around the world economy. The US spends a large majority of its money on R & D programms which in turn improve the standards of living on other countries around the world
savings by households equation
I = s * Y Y is GDP s is the savings rate I is the aggregate investment
factor of production
Second factor of production is physical capital typically denoted by K. when an economy has more physical capital it can work with better equipment and structures and thus the economy will produce more GDP. Third factor or production is land. This includes natural resources, to simplify this we only focus on physical capital and labor. when we do this the value of land and other natural resources can be included in physical capital.
interest rates
This predicts the rate of return houses predict to get on their savings. Higher interest rates typically encourage more savings.
dynamic equilibrium
This type of equilirbium traces out the economy over time. That means that this doesnt correspond to a single point, but to a path (pf physical capital stock and GDP) that will be realized over time. This is an equilibrium that is not in steady state equilibrium. This type of equilibrium will create a path that over time will bring the economy back to steady state equilibrium. (K*, s x Y *)
increasing efficiency units of labor
This would not be achieved just by increasing the number of people in the workforce because every extra person increases real GDP by less and less because of diminishing marginal product of labor. Therefore we can not guarantee a steady increase in real GDP per capita just by increasing the work force. We could try and increase the efficiency units of labor of the workforce by increasing the human capital of the workers but that would not maintain sustained growth since theres only a finite amount of education a person can go through/learn. lastly trying to increase the quality of education will not increase the efficiency units of labor.
human capital
Workers differ in this. it is their stock of skills to produce economic value or outputs. Someone who got their degree in computers will be much more productive than someone with just a highschool degree.
purchasing power parity
We have to account for the fact that different countries have different prices for similar things. For example in the US it costs less to make a phone call than it does in Mexico. Because of this we must consider this term when we properly account for different prices to to compare GDp per capita across countries. SPECIFIC DEFINITION--> this constructs the cost of a representative basket of commodities in each country and adjusts the GDP in each country so that the dollar can purchase this representative basket. So to compute this in mexico we would: =MExican GDP p.c. in pesos * $/peso PPP =140,111 * .11--> (1/.88?) This is a better measure of comparing countries because there is less of a gap between us and another country because it takes in the fact that poorer countries spend less money on goods.