M2 econ Chapter 7

Catch-up Effect

- Describes why developing countries may initially grow faster than developed countries. - Developing countries can use existing technologies to make their inputs more productive, while developed countries must innovate to increase growth. - Subject to diminishing returns to capital

Government

- Maintaining a country's infrastructure ensures efficient transport of goods and services - Government research centers produce many new technologies and innovations

Better standard of living

- More disposable income - More jobs available - faster and easier to get a job - More people are educated - Longer life expectancy - more opportunities in your lifetime or time to enjoy life, plan long term for different stages in your career, stable economy because you don't have to be training people all the time - Intrinsic benefits

Increase in Productivity caused by:

1) Improved land or discoveries of natural resources (such as oil and natural gas) lead to growth 2) Investment in human capital improves the quality of labor, leading to higher growth rates

Thomas Malthus

1766-1834 Argued that society was doomed to poverty, as population increased geometrically, while food supply grew arithmetically. His views led Thomas Carlyle to describe economics as the *dismal science*.

Joseph Schumpeter

1883-1950 Emphasized the importance of the entrepreneur. Developed key idea: *creative destruction*. Linked innovations to recessions, which are an adjustment period as new technologies are developed.

Power of compounding

Allows small rates of growth to turn into substantial increases in income over time rate of growth of your money

WHICH OF THE FOLLOWING IS NOT AN EFFECTIVE TOOL USED BY GOVERNMENT TO PROMOTE ECONOMIC GROWTH? A) A strong legal system to enforce contracts B) Trade barriers to protect domestic industries C) A stable currency and financial system D) Economic freedom and competitive markets E) Investment in the infrastructure and human capital

B) Trade barriers to protect domestic industries

Economic Freedom

Countries with higher economic freedom have a higher average per capita GDP (measured in dollars).

Countries with higher economic freedom have a higher average per capita GDP (measured in dollars). A) 3 years B) 10 years C) 23 years D) 33 years E) 70 years

C) 23 years 70/3 = 23 years

Rule of 70

Can be used to estimate the number of years for a value to double 70/Annual Growth (%)

The role of government

Can influence the economic growth in a country by: - contributing to physical capital, human capital, and technology. - enforcing contracts, protecting property rights, and maintaining a stable financial system. - promoting free and competitive markets.

Year-over-year rate

Compares GDP at the current quarter with the previous year; provides trend in growth for the entire year.

WHAT IS THE SINGLE MOST IMPORTANT FACTOR INFLUENCING ECONOMIC GROWTH FOR AN ECONOMY? A) Population growth B) Government regulation of big business C) Reducing the capital-to-labor ratio D) increased productivity E) Greater natural resources

D) increased productivity

Why is economic growth important?

Factors that contribute to the standard of living: 1) reduced poverty rates 2) improved health and longer life expectancies 3) greater investment in education and technology

U.S. GDP IS DOUBLE CHINA'S, BUT THE GROWTH RATE IS 8.8% IN CHINA AND 3% IN THE UNITED STATES. AT THAT RATE, WHEN WILL CHINA'S GDP SURPASS THE UNITED STATES'?

If the United States grows 3% per year, it doubles its GDP in about 23 years. If China grows 8.8% per year, it doubles its GDP in about 8 years. If China's GDP is half of THE United States' GDP, it will reach current U.S. GDP in 8 years. Although the United States is growing throughout this period, China will likely surpass U.S. GDP in the next 8 years, or within 16 years, assuming all growth rates remain the same as today.

Factors of Production

Land, Labor, Capital, Ideas 1) Land and natural resources (N) include land and raw resources from the land. 2) Labor (L) is mental and physical talents. Human capital (H) includes improvements to labor from training and education. 3) Physical capital (K) is manufactured items used to produce goods and services. 4) Entrepreneurship (A) is the ability to use resources to produce goods and services.

How to measure economic growth

Measured by real GDP and real GDP per capita

Production function

Measures how an economy turns inputs into outputs using existing technology - Shows the output that is produced using different combinations of inputs combined with existing technology. - The classical form of the production function determines output as a function of labor and capital: OUTPUT = f(L, K) Y = L + K (perfect substitution) Y = L * K (complimentary) - Incorporating all of the factors of production into the production function: OUTPUT = A x f(L, K, H, N) According to this function, technology (A) enhances the productivity of all physical resources.

Capital-to-labor ratio

Measures the amount of physical capital available per worker. A higher ratio equals greater labor productivity - Capital is subject to diminishing returns: Each additional unit of capital increases output by a positive but smaller amount.

Total Factor Productivity

Measures the portion of output that is not explained by the amount of inputs used. It captures the external effects influencing productivity of all inputs. Includes factors such as: - natural disasters. - new discoveries or innovations. - changes in a country's institutions.

Long-run growth

Occurs when an economy finds ways to use existing resources better Ex: The discovery of huge natural gas deposits in the US

Short-run growth

Occurs when an economy makes use of existing but underutilized resources. It is common during recovery from a recession

WHY DOES PROTECTING INTELLECTUAL PROPERTY (SUCH AS TV SHOWS) FROM PIRACY LEAD TO ECONOMIC GROWTH?

Property rights give innovators an opportunity to profit from their creations. Given this profit opportunity, innovators are more willing to invest time and money to come up with new products and services that benefit everyone, which leads to the growth of output in the economy.

Real GDP per capita

Real GDP divided by population Similar to GDP per workers which shows dependency in the nation and productivity of the country

Production Possibilites Frontier

Short-run growth is shown as a movement toward a PPF, while long-run growth is shown as an expansion of the PPF.

Measuring real GDP growth

The Bureau of Economic Analysis (BEA) provides quarterly reports on changes in U.S. GDP. The reports reflect the: Annualized rate Year-over-year rate

Annualized rate

The quarterly change in GDP is multiplied by 4; highlights seasonal fluctuations in growth.

Real GDP

Total output in a year measured in constant-year prices

Productivity

measures how effectively inputs are converted to outputs - key driver of wages and incomes.

Labor productivity

ratio of the output of goods and services to the labor hours used to produce that output

Economic Growth

the primary factor in explaining how well people live, their standard of living