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21 Cards in this Set
- Front
- Back
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What does the principle of compounding imply for long-term economic growth? |
Small differences in economic growth will result in big differences in the long-run |
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Define: technological change |
Change in the quantity of output for firms can produce given a certain quantity of inputs |
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What does standard of living critically depend on? Why? |
Labor productivity as the standard of living depends on the quantity of goods and services which can be produced |
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What are the three main sources of higher labor productivity? |
1. Better machinery and equipment: more and better physical capital 2. Increases in human capital (better knowledge) 3. Better means of organizing and managing production (better technology) |
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Define: human capital. Why is it important? |
The accumulated knowledge and skills that workers acquire from education and training. It directly influences labor productivity |
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Define: per-worker production function |
The relationship between real GDP per hour and capital per hour worked, holding technology constant |
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Define: law of diminishing returns |
When fixed inputs are added to other inputs, the outputs get incrementally smaller |
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Why is technological change important for economic growth? In the long run? |
It aids economies in avoiding diminishing returns to capital. It implies that economies can only experience growth with continued technological changes in the long run. |
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Explain the New Growth Theory |
1. Technological change is influenced by economic incentives and is determined by the market system. 2. That economic growth is dependent on knowledge capital, but is also subject to diminishing returns at the firm level. 3. But, it is the opposite (increasing returns) at the economic level as new scientific discoveries will lead to its universal usage. 4. At a point, there is a disincentive for firms to invest in research as other firms can free ride from them. |
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What are three ways the government can improve the accumulation of knowledge? |
1. Patents 2. Research subsidies 3. Educational subsidies |
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What is Schumpeter's argument regarding standard of living and entrepreneurs? |
The key to its growth lies in the development of products that meet consumer wants in qualitatively better ways. Entrepreneurs are central to economic growth as financial incentives will drive them to induce change |
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Define: catch-up (economic growth model). Why is this so? What is the truth? |
Poor countries are predicted to have faster economic growth because incentives for them to increase capital or implement better technology is higher than high-income countries. Individually, this is true, but as a group, it is not. |
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Define: rule of law and property rights. Why is the rule of law important? |
Property Rights: the exclusive rights to one's own property. The Rule of Law: the ability of a government to enforce its laws. It is important because it improves the incentives for entrepreneurs to start businesses and expand; and therefore increase labor productivity in the long-term. |
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What are some reasons why developing countries remain stagnant? |
1. Corruption: creates disincentives for entrepreneurs to create businesses 2. Poor Public Health and Education: poor human capital 3. Low rates of saving and investment: funds generated are low for business expansions |
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Define: foreign direct investment and foreign portfolio investment. What is their use? |
FDI: businesses expand to foreign countries FPI: buying securities in other countries. It can aid in alleviating low saving and investment rates |
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Define: globalization |
The process of countries being open to foreign trade and investment |
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What are growth policies which aid in economic growth? |
1. Alleviating corruption and improving the rule of law (political stability) 2. Improving health and education (subsidies) 3. Incentives promoting technological change (subsidies, or slacken foreign direct investment laws) 4. Incentives promoting saving and investment (tax savings from investment) |
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What is are the differences between private and public good? What are examples of each? |
Private goods are rival and excludable (i.e. cannot be shared). Physical capitals such as computers Public goods are non-rival and non-excludable (i.e. can be shared); knowledge capital |
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Define: 'creative destruction' |
The replacement of old products due to technological change. |
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Why can't other developing countries catch up? |
Following factors are different in other countries: 1. Rule of law 2. Political Instability 3. Poor health and education 4. Low rates of saving and instability |
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Graph interpretation: how can one determine whether catch up exists for countries? |
When there is an inverse relationship between the initial GDP to growth rates. |
