chapter 7

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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


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