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68 Cards in this Set
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Economic growth |
the process by which economies accumulate larger quantities of capital equipment, push out the frontiers of technological knowledge, and become steadily more productive |
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living standards |
-output per capita -consumption per household -primarily determined by aggregate supply and the level of productivity of a country |
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economic growth |
central objective of policy because it is important for living standards |
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Britain United States |
countries that run swiftly in the 19th century |
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political and social turmoil |
experienced by countries in economic decline |
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economic growth |
-single most important factor in the success of nations in the long run -the expansion of a country's potential GDP - occurs when the a nation's production-possibility frontier (PPF) shifts outward |
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growth rate of output per person |
determines the rate at which the country's living standards are rising |
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economic growth |
involves the growth of potential output over the long run |
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growth in output per capita |
an important objective of government because it is associated with rising average real incomes and rising living standards |
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Britain |
world economic leader in the 1800s because it pioneered the Industrial Revolution |
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Human resources Natural resources Capital Technological change and innovation |
Four wheels of growth |
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aggregate production function (APF) |
- Q=AF(K,L,R) q= output k= capital l= labor inputs r = natural-resource AF= production function/ technology -relates the 4 wheels of growth - relates total national outputs to inputs and technology |
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productivity |
ratio of output to a weighted average of inputs |
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labor inputs |
consists of quantities of workers and of the skills of the workforce |
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quality of labor inputs |
skills, knowledge, and discipline of the labor force -single most important element in economic growth |
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natural resources |
second classic factor of production |
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arable land oil gas forests water mineral deposits |
important natural resources |
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United States |
world's largest producer and exporter of grains |
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New York City Japan Hong Kong |
countries which don't possess abundance of natural resources but are economically successful |
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capital |
tangible capital goods and intangible items |
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roads power plants equipment (trucks, computers) |
tangible capital goods |
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patents trademarks computer software |
intangible items |
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social overhead capital |
investments that are necessary for the efficient functioning of the private sector and are undertaken only by the governments |
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roads irrigation and water projects public health measures |
examples of social overhead capital |
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technological change and innovation |
vital fourth ingredient in the rapid growth of living standards |
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technological change |
changes in the processes of production or introduction of new products or services |
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steam engine generation of electricity antibiotics internal-combustion engine wide-body jet microprocessor fax machine |
process inventions that have increased productivity |
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telephone radio airplane phonograph television computer DVR |
fundamental product inventions |
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information technology |
most dramatic developments of the modern era |
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innovation |
depends crucially in the development of incentives and institutions |
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-increase capital investment -stimulate research and development and technological change -a better-educated workforce |
how to increase economic growth |
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Adam Smith and T>R> Malthus |
economists that stressed the critical role of land in economic growth |
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The Wealth of Nations |
a handbook of economic development provided by Adam Smith |
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when wages are above subsistence level |
population would expand when this happens |
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when wages are below-subsistence level |
high mortality and population decline occurs when this happens |
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subsistence wages |
when this happens there could be a stable equilibrium of population |
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brutish, nasty, and short |
Malthus believed that the ruling class was destined to a life that is... |
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"the dismal science" |
Thomas Carlyle's criticism of economics |
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failure to recognize that technological innovation and capital investment could overcome the law of diminishing returns |
flaw of Malthusian theory |
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capital accumulation and new technologies |
dominant forces affecting economic development |
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neoclassical model of economic growth |
pioneered by Robert Solow of MIT -basic tool for understanding the growth process in advanced countries and has been applied in empirical studies of the sources of economic growth |
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capital and labor |
two types of inputs under the neoclassical model of economic growth |
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1. an economy with a single homogeneous output is produced by capital inputs and labor inputs 2. labor growth is given 3. economy is competitive and always operates at full employment |
Basic Assumptions of the Neoclassical model of economic growth |
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capital and technoloical change |
major new ingredients in the neoclassical growth model |
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capital |
consists of durable produced goods that are used to make other goods |
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aggregate stock of capital |
total quantity of capital goods |
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capital-labor ratio (K/L) |
quantity of capital per worker |
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Q=F(K,L) |
aggregate production function for the neoclassical growth model |
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capital deepening |
the process by which the quantity of capital per worker increases over time which results in the growth of the output per worker |
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capital deepening |
occurs when the stock of capital grows more rapidly than the labor force -it will produce a growth of output per worker of the marginal product of labor and of real wages (without technological change) - will also lead to diminishing returns on capital and to a decline in the rate of return on capital |
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long-run steady state |
when capital deepening ceases, real wages stop growing, and capital returns and real interest rates are constant |
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upward shift in the aggregate production function |
depiction of technological change |
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sum of capital deepening and technological change |
indicates an increase in output per worker |
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invention |
increases the productivity of capital and offsets the tendency for a falling rate of profit |
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New growth theory (or theory of endogenous technological change) |
research on the sources of technological change - seeks to uncover the processes by which private market forces, public-policy decisions, and alternative institutions lead to the changing patterns of technological change |
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technological change |
an output of the economic system |
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public goods/nonrival goods |
another feature of technologies |
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intellectual property rights |
-patents and copyrights - provide adequate market rewards for creative activities |
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1. governments support basic science through government grants and research facilities 2. governments must ensure that profit-oriented inventors have adequate incentives to engage in research and development |
role of public policy |
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technological differences |
major reason for differences in living standards among nations |
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capital deepening |
an important feature of 20th and early 21st century American capitalism |
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wages, salaries, and fringe benefits |
measures of an economy's performance |
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real interest rate |
interest rate on the long-term treasury securities corrected for inflation |
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1. The capital stock has grown more rapidly than population and employment because of capital deepening. 2. there has been a strong upward trend in real average hourly earnings. 3. The share of labor compensation in national income has been stable over the last century. 4. There were major oscillations in real interest rates and the rate of profit, but no strong upward or downward trend over the post-1900s period 5. the capital-output ratio has declined since the start of 20th century rather than rising as predicted in the law of diminishing returns 6. The ratio of national saving and of investment to GDP were stable. 7. Output growth has been higher than a weighted average of the growth of capital, labor, and resource inputs, suggesting that technological innovation must be playing a key role in economic growth. |
Seven Basic Trends of Economic Growth |
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growth-accounting approach |
not a balance sheet or national product account but a way of separating out the contributions of the different ingredients driving different growth trends -usually begins with the aggregate production function - resources are omitted -express the growth of output in terms of the growth of inputs plus the contribution of technological change |
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growth of output |
=growth in labor times its weight, growth in capital times its weight, and technological change |
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total factor productivity (technological change) |
growth of output less the growth of the weighted sum of all inputs |
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1. Productivity explosion in computers. 2. Capital deepening. 3. Unmeasured outputs |
Important factors of productivity rebound |
