ECON 2105 - Ch. 7

Why is economic growth important?

1. reduce poverty rates 2. improved health and longer life expectancies 3. greater investment in education and technology

Measuring Real GDP Growth

Bureau of Economic Analysis (BEA) provides quarterly reports on changes in US GDP: -reflect annualized rate -year-over-year rate

Year-Over-Year Rate

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

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.

Role of the Government

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

Factors of Production

Land and Natural Resources (N) Labor (L) Human Capital (H) Physical Capital (K) Entrepreneurship (A) Ideas

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 Classical form: Output = f(L,K) Incorporating all factors of production: Output = A x f(L,K,H,N)

Total Factor Productivity

Measures the portion of output that in not explained y the amount of inputs used. It captures the external effects influencing productivity of all inputs.

Long-Run Growth

Occurs when an economy finds new resources or finds ways to use existing resources better

Short-Run Growth

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

Real GDP per Capita

Real GDP divided by population

Real GDP

Total output in a year measured in constant-year prices

Power of Compounding

allows small rates of growth to turn into substantial increases in income over time.

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 infrastructure and human capital

b. trade barriers to protect domestic industries

If a country grows at 3% per year, approximately how many years will it take for its GDP to double? a. 3 years b. 10 years c. 23 years d. 33 years e. 70 years

c. 23 years

Rule of 70

can be used to estimate the number of years for a value to double ex: 10% annual gain 70/10 = 7 years to double value

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

Productivity

measures how effectively inputs are converted to outputs

Capital-to-Labor Ratio

measures the mount of physical capital available per worker. A higher ratio equals greater labor productivity

Annualized Rate

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

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 *most commonly measured by Real GDP and Real GDP Per Capita