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19 Cards in this Set

  • Front
  • Back

What does growth mean in terms of a country's potential output?

Why is growth a long-term phenomenon?

It means that that potential output is gradually increasing as time progresses.

Because the economy takes time to grow.

How do we use the 'Rule of 70'?

We use the rule of 70 to calculate how long it will take the real output of a country to double, given its rate of growth.

The rate of growth, multiplied by the number of years it will take to double, equals 70.

What does growth say about the living standard?

That it is gradually improving.

If Y is equal to the output of a market, and Y/L is equal to the productivity of a market, then what does the letter L represent?

It represents the number of workers in that market.

If we are to create a function that the output of which was the output of a market, what would be the parameters (inputs) to that function?

Hint: The letters k, n, l, and h.

k - physical capital

n - natural resources

l - number of workers - labour

h - human capital - knowledge, health, skill

Y = A F(K, L, H, N)

In this function that returns the output of a market, what does A stand for? What about F?

A - the total factor productivity

F - technological knowledge

'common knowledge'

When we put output and all of the inputs over L to find GDP per person, or productivity, we find that two of the inputs are very hard to measure, one is trivial, and one is easy to measure.

Which input is which?

h - human capital, and n - natural resources, both hard to measure.

l - number of workers becomes trivial, number of workers per worker?

k - physical capital is the easiest to measure.

What does the graph of real output as a function of physical capital look like?

What does this mean?

It looks akin to a log function, as k increases so does y, but at a decreasing rate.

This means that the living standard continues to increase as physical capital increases, but at a decreased rate.

What is the 'Catch-Up Effect'?

The belief that because of the shape of the y as a function of k graph, over time, the gap between the richer countries and the poorer countries will gradually close.

The poor countries will catch up.

What is the policy implication of the Catch-Up Effect?

It implies that there is no need to help the poorer countries catch up; they will naturally do so on their own. If we were to help them, the outcome may be distorted.

What is the fundamental fallacy of the Catch-Up Effect?

That the function on the graph that represents the richer country is the same as that of the poor country; it is not! Poorer countries do not have the same development progress as the rich. They are actually controlled by the rich countries.

What is the 'Widening Gap Phenomenon'?

The poorer countries aren't actually catching up; in fact, the gap between the poor and the rich is actually widening.

Why do rich countries advance faster?

Largely because of technology. That of the richer countries is better, and newer. The poorer countries receive hand-me-down tech from the richer countries.

It is actually in the best interest of the rich countries to help the poorer countries to increase their output per worker.

Why is this?

A wide gap encourages illegal immigrants to leave their own countries to move to more wealthy ones.

To discourage illegal immigrants, we should be assisting the poor countries.

How do rich countries 'steal' education and resources from the more poor countries?

By allowing their best and brightest to immigrate after being trained in those countries. This keeps the poor countries poor.

So poor countries need foreign investment to progress at the same speed as the more rich countries.

What are some ways that they can receive that investment?

They can receive that investment directly via:



Or indirectly via:


What are some constraints on the growth of poor countries?

A lack of natural resources - Countries with none are disadvantaged.

Political instability - Means less investment, less physical capital in the future, less growth.

A weak legal system - Needs to be clean and effective, or investment isn't likely.

No free trade - No knowledge spillover.

How is the environment a constraint on growth?

It says that growth must be sustainable. Look at China - though it has grown enormously recently, the air pollution has been terrible.

Are we helping the poor?

On the table - yes.

Underneath - not so much. Many of the professionals of the poorer countries come to us for better lives.