Chapter 7

Early growth theory

Classical model

What influences productivity?

Increasing the capital-to-labor ratio, growth of the labor force, increasing the quality of the labor force, and improvements in technology

Infrastructure

a country's public capital, including transportation networks (airlines), public education facilities, and other intangible resources such as protection of property rights

Classical model

a model of the economy that relied on competitive conditions in product, labor, and capital markets, and flexible prices, wages, and interest rates to keep the economy operating around full employment

Economic freedom index

an index that incorporates information about freedoms in business, trade, fiscal policy, government size, monetary policy, investment, finance, property rights, government corruption, and labor

Productivity

as productivity rises, real wages rise as well

Technology improvements

come from various sources and play the major role in improving produtivity, raising the standard of living and increasing economic growth

Enforcement of contracts

economic growth is more likely to occur if businesses have to hold up their side of a contract

Growth of the labor force

growing faster than the population, increase in women and immigration

Investment in human capital

improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity

Stable financial system

keeps purchasing power of the currency stable, facilitates transactions, and permits credit institutions to arise, weak financial system= weak economy

Long-run economic growth

productivity

Modern growth theory

suggests that research and development improve technology, which in turn drives economic growth through its huge public good aspects and positive spillovers

Capital-to-labor ratio

the capital employed per worker, a higher ratio means higher labor productivity -->higher wages

Increasing the quality of the labor force

the more highly trained or educated a worker is, the more productive he/she will be, investment in human capital

Protection of property rights

with proof of ownership, property can be leveraged for loans that can lead to new businesses and economic activity