macro exam 2

Post-industrial revolution period

-Has experiences sustained growth in income per capita due to dramatic *innovations in transportation, communications, electricity, and later computers*

3 reasons why productivity differs across countries

-Human capital: each person's ability to produce output -Physical capital: any good, including machines & buildings, used for production -Technology: improvements in the design of production so more output can be produced with the same human and physical capital

Culture hypothesis and religion

-In 1905, the German socialist Max Weber argued that *Protestant beliefs lead to a greater work effort, higher savings, and increased income.* -Almost 20 years ago, the Harvard political scientist Samuel Huntington talked of a *"clash of civilization" between the West and Islam.*

Institution hypothesis and the two koreas

-In the 1940s, North and South Korea were a single country, with a unified language, culture, and geography. -In 1947 the country split in two -By 2010, North Korea was an economic "disaster," while South Korea was a "miracle"

Quality-quantity tradeoff

As economies develop parents can secure a higher earning prospect for their kids through increasing investment in human capital -"Higher quality kids" -Involves the tradeoff of having fewer kids so they can invest more in their children's "quality"

Proximate causes of prosperity

high levels of factors of production such as *human capital, physical capital, and technology* that result in a high level of GDP per capita -The factors of production are proximate causes because they link high levels of prosperity to high levels of the factors, *without providing an explanation for why the factors are high*

Economic Institutions

the aspects of the society's rules that concern economic transactions

Political Institutions

the aspects of the society's rules that concern the allocation of political power and the constraints on the exercise of political power

What drives income per capita and income per worker differences across countries?

*Productivity differences* -productivity: the value of goods and services that a worker generates for each hour of work

Consequences of immigration

-A rise in the labor force through immigration leads to an *increase in investment* and a *larger economy that seems to be more productive* -immigration is about as impactful on the top half (skilled) as it is on the bottom (unskilled), thus its effect on the economy essentially neutral -increased immigration may contribute to political divisiveness

Economic assimilation for immigrants

-American dream is overstated -Very little catchup opportunity for immigrants who start at the same earnings as natives -For immigrants who started out worse than the native born, after 30 years there is little evidence of "catching up" and instead evidence of persistence in gap trends. *This shows that it takes more than one generation for immigrants to "catchup."*

Malthusian Cycle

-Any increase in income per capita above the subsistence level would lead to higher fertility rates -"Higher fertility rates fuel higher population growth which in turn would drive in come per capita back down to subsistence level" *Theory proved wrong during the industrial revolution*

Thomas Malthus

-Argued that humankind was destined to live at the *subsistence level* -First person to relate income to fertility rate

How can we deal with aging economies?

-Breaking up large firms to increase competition to force acceptance of technology -Limit the length of tenures to reduce influence of older workers -Using immigration to expand the labor force and create new taxpayers -Raising the retirement age and pushing off age that people can access pensions

Why has fertility declined? (4)

-Contraception technology has improved and social norms have changed -Quality/Quantity tradeoff -Increase in women's market wage -Increase in divorce rate

Longevity gains (4)

-Direct income effect -Better public health -Advances in medical technology -Increase in adult longevity

Extractive economic institutions

-Do not protect private property rights -Do not uphold contracts -Interfere with the workings of markets. -Restrict entry into new lines of business and occupations

How much economic growth was there in the pre-modern period?

-Essentially no growth in the world economy -From 1870 on, growth began to steadily increase

Limitations of PPP (purchasing power parity) adjustments

-Even though PPP adjustments raise the income levels of the developing countries, *there are still very large disparities in income per capita across countries* -The PPP conversion *misses differences in product qualities and varieties available to consumers in different countries*

Geography hypothesis about tropical climates

-In the past, the French philosopher Montesquieu and the British economist Alfred Marshall argued that *tropical climates decreased work effort* -Economist Jeffrey Sachs and geographer Jared Diamond argue that *tropical climates are more prone to infectious diseases such as malaria and dengue fever, which result in poverty.*

Why are some nations unable to develop?

-Majorly dependent on political institutions -Inclusive institutions incentivize innovation for all people which helps countries grow/develop -Extractive institutions block talent and creativity which limits opportunities for growth/development -In poor, unstable countries you find both inclusive and extractive institutions -In successful countries you find inclusive institutions -In countries where the power lies only in the hands of a few you find extractive institutions

Demand and Immigration

-People need to be able to find a job -In US there is demand for highly skilled immigrants to work in STEM fields -large demand for immigrants to flow through universities -On the lower end there is high demand for undocumented immigrants to work for low wages in unregulated jobs

What are the 3 distinct periods in the economic history of the world?

-Pre-modern times (up to 1800) -Industrial Revolution (1800-1820) -Post industrial revolution (1820-present)

Economic institutions include (4):

-Protection of property rights and ownership -Impartiality of the justice system -Financial arrangements between savers and borrowers -Regulations concerning new businesses or occupations

Increase in women's market wage

-Raised the opportunity costs of motherhood; Women have to give up more to have a child than they used to -They have to give up income, education/career opportunities, lifestyle, etc. -They have more rights and independence than they used to so now they have a choice

What are the 3 different factors that determine who gets into a country and why?

-Supply -Demand -Policy

Where do immigrants tend to be clustered?

-Tend to cluster in cities and specific jobs -Immigrants work mainly in agriculture/food and the medical field

How did institutions play a role in the economic differences in N and S Korea?

-The South Korean autocratic government adopted a market-based economy, providing *incentives for investment in physical and human capital* -The North Korean dictatorship adopted a strict communist system that *outlawed private property and banned markets*

Improved contraception technology and changes in social norms

-The ability to avoid unintended pregnancies reduced fertility rate by 20% -More support from society if you aren't having children; less taboo

Why is the average American so much richer than the average Indian?

-The average American is so much richer than the average Indian mostly because of better technology in the US. (look at table)

How does China's political institution impact their ability to develop?

-The communist party's oppression of anything that looks threatening doesn't support innovation in society -Their suppression of information and discussion amongst citizens doesn't allow for innovation and ultimately limits their economic growth/development

Culture hypothesis

-different values and cultural beliefs are ultimately responsible for the large differences in prosperity observed around the globe

Increase in adult longevity

-made through investment in human capital (ex: education is more beneficial) -Increased investment in human capital leads to decreased fertility and increased longevity resulting in *demographic aging* -Increases need for social security and medical spending *(may be a growth barrier)*

Cultural assimilation for immigrants

-natives tend to complain about how immigrants are different and how they wish there was more assimilation -Names are a signal of cultural identity b/c they reflect a choice to assimilate -immigrants choose less foreign names for their children as they spend more time in the US.

Attitudes toward immigration

-people care about the direct effects of immigration on their wages, taxes and the compositional effects on their neighbors, co-workers, and school mates -concerns about composition are a major factor in how people make their choices about where to live and what school to send their kids to due to the fact that they don't want their kids to be surrounded by immigrants -*views are mostly dependent on compositional concerns* -*older, rural, and non-college grads have more negative policies due to their concerns about compositional issues*

Policy and Immigration

-people have to be able to get into the country -In US policy, there is a lot of regulation at the top through the H1-B program, and very little regulation at the bottom -"don't ask, don't tell" situation as far as hiring illegal immigrants goes

Supply and immigration

-people have to want to move -incentive for highly skilled workers to move to US because lower taxes and higher wages at the top -Incentive for immigrants from poor countries because potential earning gains are highest for the lease skilled

Problems with using exchange rate method (method 1) to compare GDP across countries

-prices of goods and services can vary across economies; prices are usually lower in developing countries -Exchange rates fluctuate throughout the year due to reasons beyond price changes

Increase in divorce rate

-raising kids may be harder and more expensive for single/divorced parents

Crime and immigration

-very little evidence of link between crime and immigration -immigrants without labor opportunities are more likely to commit property crimes -immigrants decide whether or not to commit crimes based on opportunity cost -when they have more to gain by committing a crime than in the work force they will commit the crime -immigration policy needs to focus on creating more labor market opportunities for immigrants

3 important features of institutions

1. They are determined by individuals. 2. They place constraints on behavior. 3. They shape human behavior by determining incentives.

Which GDP comparison method do we use?

1st method is easier to apply, but then 2nd is more appropriate due to price differences

What 2 trends led to the end of the malthusian cycle?

2 trends led Britain and then other countries to break out of the cycle: - The introduction of *new machines and methods of production* during the Industrial Revolution created the technological progress necessary for sustained growth -Industrialization which was paired with *movement of people from rural agriculture to urban manufacturing* was followed by a *"demographic transition"* and *sharp decline in fertility rates*

Which of the following statements is true of the Industrial Revolution? A) It was a gradual process. B) It was a period of rapid disruption. C) It started in the United States. D) It started in the capital goods industry.

A) It was a gradual process.

If the geography hypothesis holds, then: A) poorer countries are permanently disadvantaged. B) poorer countries are likely to catch up with richer countries very fast. C) living standards in poorer countries can be substantially improved. D) cultural beliefs can be considered to be an important source of economic prosperity.

A) poorer countries are permanently disadvantaged.

How does the aging of economies affect growth?

Aging slows growth because: -Fewer workers to increase output -Increased gov't spending on pensions and healthcare -Weakened productivity

Which of the following statements is true of Malthus's theory? A) Malthus suggested that in the long run, income levels will grow exponentially. B) Malthus suggested that in the long run, income levels will stay at subsistence. C) Malthus suggested that fertility level of the population will remain constant over time. D) Malthus suggested that the life expectancy of the population will remain constant over time.

B) Malthus suggested that in the long run, income levels will stay at subsistence.

Which of the following statements is true? A) After the demographic transition in the 19th century, they were recurrent Malthusian cycles. B) Until the demographic transition in the 19th century, they were recurrent Malthusian cycles. C) The demographic transition of the 19th century led to an increase in fertility across the Western world. D) The demographic transition of the 19th century led to a decrease in life expectancy across the Western world.

B) Until the demographic transition in the 19th century, they were recurrent Malthusian cycles.

A hypothesis states that religious teachings, family ties, and/or social norms are the root cause of economic prosperity. According to this hypothesis: A) culture is a proximate cause of prosperity. B) culture is a fundamental cause of prosperity. C) geography is a fundamental cause of prosperity. D) institutions is a fundamental cause of prosperity.

B) culture is a fundamental cause of prosperity.

Countries in sub-Saharan Africa are economically disadvantaged because infectious diseases spread in these countries relatively easily. This statement reflects the: A) culture hypothesis. B) geography hypothesis. C) institutions hypothesis. D) location hypothesis.

B) geography hypothesis.

Subsistence level

The minimum level of income per person necessary to survive

Which of the following correctly identifies a Malthusian cycle? A) Increase in GDP increases GDP per capita above subsistence, which causes a decrease in the size of population that would reduce pressure on resources and increase GDP per capita further. B) Increase in GDP increases GDP per capita above subsistence, which causes an increase in the size of population that increases pressure on resources and further increase GDP per capita. C) Increase in GDP increases GDP per capita above subsistence, which causes an increase in the size of population which increases pressure on resources and eventually reduce GDP per capita. D) Decrease in GDP would decrease GDP per capita below subsistence, which will cause an increase in the size of population which would increase pressure on resources and eventually reduce GDP per capita.

C) Increase in GDP increases GDP per capita above subsistence, which causes an increase in the size of population which increases pressure on resources and eventually reduce GDP per capita.

Which of the following statements is true? A) Nation's stock of human capital and geography can be considered proximate causes of prosperity. B) Nation's stock of human capital and geography can be considered fundamental causes of prosperity. C) Nation's stock of human capital and physical capital be considered proximate causes of prosperity. D) Cultural and geographical conditions of a nation can be considered proximate causes of prosperity.

C) Nation's stock of human capital and physical capital be considered proximate causes of prosperity.

The demographic transition refers to the: A) increase in fertility and number of children per family that many societies undergo as they transition from industry to agriculture. B) increase in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. C) decrease in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. D) decrease in fertility and number of children per family that many societies undergo as they transition from industry to agriculture.

C) decrease in fertility and number of children per family that many societies undergo as they transition from agriculture to industry.

The reason why the differences in the growth stories of North Korea and South Korea can be viewed approximately as a natural experiment or an experiment of history is that: A) culture in both countries was changing radically, while geography and institutions have not. B) geography in both countries was changing radically, while culture and institutions have not. C) institutions in both countries was changing radically, while geography and culture have not. D) institutions, geography, and culture in both countries were changing radically.

C) institutions in both countries was changing radically, while geography and culture have not.

Which of the following statements is true? A) Both extractive and inclusive institutions fail to foster economic activity, growth, and activity. B) Both extractive and inclusive institutions foster economic activity and growth. C) Extractive economic institutions foster economic activity, productivity growth, and economic prosperity, while inclusive institutions fail to do so. D) Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity, while extractive institutions fail to do so.

D) Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity, while extractive institutions fail to do so.

Which of the following statements is true? A) The type of institutions in a nation is considered a proximate cause of prosperity. B) Societal religious beliefs and existing social norms are key proximate causes of economic prosperity. C) Cultural and geographical factors that affect economic prosperity can be changed faster than the institutional factors that affect it. D) Institutions determine the degree to which society accumulates factors of production and adopts new technology.

D) Institutions determine the degree to which society accumulates factors of production and adopts new technology.

Rapid population growth in Malthus's theory is constrained through: A) higher fertility and mortality. B) reduced fertility and mortality. C) higher fertility and reduced mortality. D) reduced fertility and higher mortality.

D) reduced fertility and higher mortality.

The minimum level of income per person that is generally necessary for the individual to obtain enough calories, shelter, and clothing to survive is referred to as: A) safety level of income. B) minimum wage rate. C) survival wage rate. D) subsistence level of income.

D) subsistence level of income.

Fertility refers to: A) the average period that an individual may be expected to live. B) the ability of an individual to read or write in at least one language. C) the ratio of deaths in an area to the population of the area. D) the number of children per adult or per woman of childbearing age.

D) the number of children per adult or per woman of childbearing age.

Income per worker

GDP divided by the number of people in employment -age structure and labor participation rates vary across countries -variation impact income per capita, therefore it's valuable to look at income per worker

Inclusive economic institutions

Institutions that support and encourage economic transactions and, as such: -Protect private property -Uphold law and order -Allow and enforce private contracts -Allow free entry into new lines of business and occupations

How do we make GDP comparisons between countries?

Method 1: convert GDP into US dollars using current exchange rates *GDP per capita*= [(GDP per capita in local currency x ($)]/local currency exchange Method 2: Convert GDP using prices of goods and services in one country relative to the prices of the same goods and services in another country *(PPP=purchasing power parity)* *GDP per capita*=(GDP per capita in local currency) x (PPP)

Why are companies with older workers less productive?

Older workers are reluctant to accept new technology that would increase productivity

Relationship between malthusian cycle and pre-modern times

Prior to the technological advances of the industrial revolution, pre-modern times were stuck in the Malthusian cycle of *little to no sustained growth in income per capita*

Fundamental causes of prosperity

The root reasons for the differences in the proximate causes; *deep determinants of economic development*; can be broken into 3 theories: -Geography hypothesis -Culture hypothesis -Institution hypothesis

Relationship between income per capita/per worker and various measures of standard living

There is a positive relationship *as income increases, standard of living increases* -Slides 33,34, & 35 show evidence of this relationship using absolute poverty rates, life expectancy, and the Human Development Index to measure the standard of living

Geography hypothesis

claims that differences in geography, climate, and ecology are ultimately responsible for the major differences in prosperity observed across the world

Institution hypothesis

differences in the way societies organize themselves and shape the incentives of individuals and businesses are ultimately responsible for the large differences in prosperity observed around the globe

better public health

disinfected water, better knowledge about sanitation & hygiene

Advances in medical technology

increased prevention, diagnosis, and curing of diseases since the discovery of antibiotics, organ transplants, endoscopy

Direct Income Effect

more & healthier food supports a stronger immune system