Chapter 7: Economic Growth

What is the most common method used to measure economic growth?

GDP

real GDP

The total value of final goods and services produced in a country in a year measured using prices in a base year.

economic growth

A change in a country's output or income that leads to an improvement in the standards of living.

Explain why small differences in growth lead to large differences in income over time.

- Power of compounding growth - Small differences in growth rates translate into large difference in output and income over time. Just a 1% difference in growth over time can make one country appear rich and another country appear poor.

Explain why productivity is important for economic growth and higher standards of living.

- Productivity is the key driver for economic growth and rises when labor is able to produce greater quantities and higher values of output. - Increased productivity of labor can come from increases in land and natural resources, the quality of the labor force, the capital-to-labor ratio, and technology. - Physical capital is subject to diminishing returns, which allows countries with less starting capital to experience a catch-up effect as they acquire more capital. - Total factor productivity measures the portion of output that is not explained by the amount of inputs placed in use. It captures the external effects that influence the productivity of all inputs.

List some of the important ways in which the government can aid economic growth

- The government has an important role in promoting economic growth by providing physical and human capital, ensuring a stable legal system and financial markets, and promoting free and competitive markets - Enforcement of contracts - Production of property rights - Stable financial system

List three major influences affecting Total Factor Productivity.

- Total factor productivity captures the factors that influence the overall effectiveness of inputs. - The value of new innovations, which increases the efficiency of inputs used in production. - Total factor productivity is also influenced by the institutions in place within a country.

Productivity

How effectively inputs are converted into outputs. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output. Productivity and living standards are closely related.

List and define the factors of production.

Land and natural resources (N) - Include land and any raw resources that come from land, such as mineral deposits, oil, natural gas, and water. Labor (L) - Includes both the mental and the physical talents of people. Human capital (H) includes the improvements to labor capabilities from training, education, and apprenticeship programs. Physical capital (K) - Includes all manufactured products that are used to produce other goods and services. This includes machinery used in factories, cash registers in stores and restaurants, and communications networks used to track shipments. Entrepreneurial ability and ideas, or technology (A) - Describes the ability to take resources and use them in creative ways to produce goods and services that people will buy. For example, technology improves the productivity of all factors and therefore is considered a highly valuable input in production. In other words, land, labor, and physical capital are not useful without entrepreneurial ability

Production function

Measures the output that is produced using various combinations of inputs and a fixed level of technology.

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.

real GDP per capita

Real GDP divided population. Provides a rough estimate of a country's standard of living.

Explain the difference between short-run and long-run economic growth and how both are shown in the production possibilities frontier diagram.

Short-Run - Involves a fixed capacity - Occurs when an economy makes use of existing but underutilized resources. - Common when countries are recovering from an economic downturn or when obstacles preventing resources from being fully used are loosened. - 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. Long-Run - Involves expanding capacity - Occurs when an economy finds new resources or improved ways to use existing resources (the capacity to produce goods and services increases). - Long-run growth occurs when the productive capacity of an economy is expanded through more resources or better uses of existing resources (i.e., technological advancements) and is shown in a PPF diagram.

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.