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41 Cards in this Set

  • Front
  • Back
Real GDP shows:
standard of living and stage of economic development
What is the best variable for measuring economic growth?
Y/population
What do these variables stand for? Y, L, K, H, N, F, A
Y = total output
L = labor
K = physical capital
H = human capital
N = natural resources
F = unspecified form
A = technology
4 different ways to express Y/population
Real GDP/population
Y/person
Per capital income
Per capita real GDP
Power of compounding
a small difference in growth rates, will make big differences in size of economy over time
Economic reasons for poorer countries pass up rich countries over time
an increase of any aspect of labor of productivity
Definition of labor productivity
the quantity of goods and services produced from each unit of labor input
Definition of production function
the relationship between the quantity of inputs used and the quantity of output produced
Increase in Y/person is caused by:
increase in growth rate of labor productivity
4 determinants of productivity
1. K/L = physical capital/labor
2. H/L = human capital/labor
3. N/L = natural resources/labor
4. A = technological knowledge
Def. of physical capital
equipment and structures
Def. of human capital
amt of skilled embodied in work force, usually measured by education and amt of training
Def. of natural resources
inputs in the production process that are supply by nature, like land rivers and mineral deposits
How is labor measured?
By the number of hours worked
Level of productivity is measured by:
the levels of its determinants
Growth rate of labor productivity depends on:
growth rates of each of its determinants
Def. of Diminishing returns to capital
the increase in output from an extra unit of an input declines as the quantity of the input increases
How the amount of natural resources can change the level of per capital income
the natural resources could increase causing more Y/person or it could decrease causing less Y/person
The unique characteristic of knowledge
one person's consumption of that knowledge does not reduce the amount available for others to consume
Why is knowledge important for poor countries?
The more they know about machines/technology, new ways to produce goods, and how to use less inputs to produce goods, increases their productivity
Def. of proprietary knowledge
whoever has this knowledge gets it and keeps it

Ex. Patents
Capital stock =
nations available supply of plant, equip, and software
Investment =
flow of resources into the production of new capital
Saving by households =
Their savings go to financial institutions or banks and used by businesses for investments
If government encouraged saving and investment spending what would happen?
it would increase productivity and Y/person
How would encouragement on saving and investment raise Y/person?
Savings > businesses can invest > investment equals more capital stock > capital is an input in production
Will the increase in savings help for awhile and/or in the long run?
It helps Y/L and Y/person increase for "a while", but diminishing returns sets in and slowly these 2 variables get lower and lower

Awhile COULD mean a couple decades for some countries
2 sources a country can get funds
1. saving by domestic country
2. funds from foreigners
What the World Bank does
organization that sets up low-interest loans for poor countries and rich nations provide the funds for the loans
Foreign direct investment
A capital investment that is owned and operated by
a foreign entity
Foreign portfolio investment
An investment that is financed with foreign money but oper-
ated by domestic residents
Greater education leads to:
greater productivity and increase in Y/person
The argument for public funding of education
a person gains knowledge from education and comes up with an idea and shares it and everyone gains from it.

Meaning the return to society from this persons investment in education is greater than the return to the individual
What 3 policies could be made to increase H/L?
1. encourage attendance
2. improve quality of education
3. make low-interest loans available for college
Health and nutritions vicious cycle
poor health = low productivity and low Y/person

Rich countries and World bank can step in at this point
2 sources for funds for Research and development
Private sector and government (it encourages research)
What else will happen when R&D increases?
Current consumption goods will need to go down (trade off)
What would happen if there were no property rights or political stability?
No one would want to invest to increase capital stock, therefore decreasing Y/L and Y/person!
How can free trade help a country?
A poor country can import new technology which increases productivity
What are the 8 policies to promote economic growth
1. capital formation (saving and investments)
2. foreign investment
3. improving education
4. improving health and nutrition
5. Research and development
6. property rights and political stability
7. Free trade
8. Population
Def. of Catch up effect
countries that start off poor tend to grow more rapidly than countries that start off rich