Chapter 7
Entrepeneurship
(A) is the ability to use resources to produce goods & services
Human Capital
(H) includes improvements to labor from training & education
Physical Capital
(K) is manufactured items used to produce goods & services
Labor
(L) is mental & physical talents
Land & Natural Resources
(N) include land & raw resources from the land
Long-run growth
(expanding capacity) occurs when an economy finds new resources or finds ways to use existing resources better- we want to expand on the resources, find new resources & expand making the resources better. Ex: discovery of large natural gas deposits in the US can contribute to long-run growth
Short-run Growth
(fixed capacity) occurs when an economy makes use of existing but underutilized resources- common during recovery from a recession, happening right now: unemployed workers, underutilized resources: planes sitting empty, many stores & restaurants are empty, when these resources are back in use, this generates short term growth; using resources we already had.
Two ways of measuring Real GDP growth
1. Annualized rate 2. Year-over-year rate
Why is economic growth important?
1. Reduced poverty rates 2. Improved health and longer life expectancies 3. Greater investment in education & technology (main drivers in future growth)
What drives economic growth? Describe at least three ways in which a country can increase its growth rate.
1. contributing to physical capital, human capital, and technology 2. enforcing contracts, protecting property rights, and maintaining a stable financial system 3. promoting free and competitive markets Ex: roads, traffic lights, airports = maintained by the gov't
If a country grows at 3% per year, approximately how many years will it take for its GDP to double?
23 years 70/3 growth rate = 23
Think about the Rule of 70 used to estimate the time it takes for a value to double. If the average annual growth rate of your stock portfolio is 5%, how many years would it take for your portfolio to double in value? What if the growth rate increases to 7%?
5% = 3.5 years 7% = 5.25 years
What is the difference between annualized growth and year-over-year growth?
Annualized growth is more volatile highlights seasonal fluctuations in growth and year-over-year growth is more accurate in looking at growth based on now to 12 months prior.
The government plays an important role in promoting economic growth. Provide an example of how government contributes to the development of infrastructure.
Building dams, bridges, power generating facilities
Year-over-year rate
Compares GDP at the current quarter with the previous year; provides trend in growth for the entire year. More accurate in looking at growth based on now to 12 months prior.
How is economic growth measured?
GDP & Real GDP (use constant dollars to remove the effects of inflation, allowing for more accurate comparisons in output from year to year)
Provide an example of how government can faciliate economic growth by developing institutions.
Human capital through education, grants through research, innovation & technology promotes economic growth.
productivity
Key driver for economic growth- measures how effectively inputs are converted to outputs- producing more using less resources, inputs. Key driver of wages and incomes. When workers have access to better tools and equipment or are better educated, productivity increases, resulting in higher standards of living.
Modern form of production function
More realistic based on Solo model, incorporating all of the factors of production into the production function- according to this function, technology (A) enhances the productivity of all physical resources: OUTPUT = A x f (L,K,H,N)- thus shifting the PPF outward, therefore, to achieve a close measure of of output per person.
Is standard of living correlated to gross domestic product?
No- there are some things in life that we're affected by that are not measured in monetary terms. Ex: 2020 Pandemic
Rule of 70 formula
Number of years to double in value = 70/growth rate Ex: Growth rate is 10%, it would take about 70/10 = 7 years for $1,000 to double to $2,000, another 7 years (or 14 years total) to double again to $4,000, another 7 years (21 years total) to double again to $8,000
Output per worker
Output per worker = A x f (L/L, K/L, H/L, N/L)- adjusts the production function for changes in population growth in a country.
Government enhances human capital at a lower cost to students
Public colleges and universities- in state tuition: gov't subsidizes paying 80% of the in state subsidy.
Government plays important role in ensuring that every person has access to minimum level of education
State laws mandate that children stay in school until minimum age, 16- subsidize public and universities by local and state governments, various forms of financial assistance to students to use toward educational expenses, Pell Grants, GI Bill, federal subsidized loans, and various tax incentives that allow qualified students to deduct a portion of their tuition or fees from their taxable income, or directly from their taxes.
Government research centers
Supporting research through grants. National Institutes of Health, Los Alamos National Laboratory and Sandia National Laboratories, National Aeronautics and Space Administration (NASA), National Oceanic and Atmospheric Administration (NOAA)- purpose of advancing knowledge and inventing products that enhances the lives of all citizens & promote economic growth.
Who calculates real GDP?
The Bureau of Economics Analysis (BEA)
Annualized Rate
The quarterly change in GDP is multiplied by 4; highlights seasonal fluctuations in growth- the one that's always reported; more volatile
What is the primary driver of measuring standard of living?
Through economic growth through GDP
Explain what real GDP growth measures and why it is the most important measure of economic growth.
Total output in a year measured in constant year prices. Important for measuring and comparing economic growth across countries
Which measure would be less affected by seasonal fluctuations in economic activity?
Year-over-year rate
US GDP is about 50% greater than China's GDP, but the growth rate is 6% in China and 3% in US. At that rate, will China's GDP surpass that of the US in 23 years?
Yes, 3% US = double in 23 years, 6% China = double in 1 years
Economic Growth
a change in a country's output or income that leads to an improvement in the standard of living
Role of government in promoting economic growth
a government can influence the economic growth in a country by 1. contributing to physical capital, human capital, and technology 2. enforcing contracts, protecting property rights, and maintaining a stable financial system 3. promoting free and competitive markets Ex: roads, traffic lights, airports = maintained by the gov't
Power of compounding
allows small rates of growth to turn into substantial increases in income over time- speeds up the amount of growth OVER TIME ($1,000 at 5% = $5,516 in 35 years, $1,000 at 10% = $28,102 in 35 years)
catch-up effect
describes why developing countries may INITIALLY GROW FASTER than developed countries- countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to grow faster than countries with abundant capital. Ex: South Korea, after Korean War was one of the poorest countries. Catch-up effect, they are are one of the richest countries. In order to keep growing they have to be innovative and create new technology (LG, Samsung, Hyundai, Kia) frontiers of economic growth
Classical form of production function
determines output as a function of labor & capital Output = f (L,K) If an economy has 10 units of labor and 10 units of capital, total output would equal 10 + 10 = 20 Not as simple as this, the idea is that more inputs can produce more output according to some functions.
diminishing returns to capital
each additional unit of capital provides a smaller increase in output than the previous unit of capital. Ex: 1st computer is important, if you have 10 devices, not as important. Ex: if Himalayan farmer purchases a tractor, then increase in production will be dramatic. If he purchases an irrigation system, will further increase productivity but not as much as tractor.
Government maintaining a country's infrastructure ensures
efficient transport of goods and services Ex: bridges, dams, roads, transportation, networks, power-generating plants, and public schools
Government ensures that an effective legal system is in place to
enforce contracts and protect property rights, and that the financial system is kept stable. Contract enforcement promotes economic growth by ensuring that production and purchasing commitments are honored by producers and consumers.
Why do free and competitive markets promote economic growth?
free trade without heavy regulations or restrictions, firms can pursue their interests, open and close when they want
outputs
goods and services
investment in human capital
improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity -human capital including master's and PHD degrees, on the job training, government programs like universal public education raise the rate of economic growth
Index of Economic Freedom
is a reasonably objective measure that incorporates information about freedoms in 12 categories: property rights, government integrity, judicial effectiveness, taxes, government spending, fiscal health, business, labor, money, trade, investment, and finance
labor productivity
is the ration of output of goods & services to the labor hours used to produce that output- outputs using less workers (robots replacing people leading to structural unemployment, increases in land & natural resources, quality of the labor force, the capital-to-labor ration, and technology
factors of production
land, labor, capital, entrepreneurship
Government as a promoter of free and competitive market
maintaining competitive and efficient markets and the freedom for firms and individuals to pursue their interests. Regulations- making sure they do not stand in the way of efficient market operations. Ability of firms and businesses to open and close without unnecessary restrictions or burdens. Free trade- the ability to buy and sell products with other countries without significant barriers, such as tariffs or quotas.
capital-to-labor ratio
measures the amount of physical capital available per worker- higher ratio means higher labor productivity and higher wages. Ex: American farmers using equipment that allows them to plow, plant, fertilize, water, and harvest vs Himalayan farmer plowing field with a crude plow hitched to a couple of yaks. American farmers earn more income.
total factor productivity
measures the portion of output that is not explained by the amount of inputs used- growth that occurs not through employee capital Ex: natural disasters, new discoveries or innovations, changes in a country's institution, shock to an economy
long-run growth PPF relationship
occurs when the productive capacity is expanded through more resources or better uses of existing resources (Ex: technological advancements) and is shown in a PPF diagram as an outward shift of the PPF
Rule of 70
provides an estimate of the number of years for a value to double and is calculated by dividing 70 by the annual growth rate- fairly accurate for small growth rates
The Bureau of Economics Analysis (BEA)
provides quarterly reports on changes in the U.S. GDP reflecting annualized rate (quarterly change x 4) and year-over-year rate
Real GDP per capita
real GDP divided by the total population- provides rough estimate of a country's standard of living
Production Function
relationship between the amount of inputs used n production and the amount of amount of output produced- measures how an economy turns inputs into outputs using existing technology (used to determine whether a country is using its limited resources efficiently and to what extent it can experience long-run growth)
inputs
resources
short-run growth PPF relationship
short-run growth occurs from using resources that have been sitting idle or underutilized and is represented in a PPF diagram as a movement from a point within the PPF towards the PPF.
compounding
the ability of growth to build on previous growth. It allows variables such as income and GDP (as well as debt) to increase significantly over time.
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