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econ ch 7
| Question | Answer |
|---|---|
| Economic growth, growth | the increase in real GDP per capita of an economy |
| exponential growth | a process by which a quantity, like a GDP per capita, grows at a constant proportion or growth rate. New growth builds on past growth, and its effects compunt |
| implications of exponential growth | a small change in growth rates lead to large differences in level of GDP per capita it is more convenient to use an axis with a proportional scale |
| comparing growth between different countries | look at how a country's GDP per capita has evolved relative to the GDP per capita of the US |
| Catch-up growth | when poor countries tend to GROW FASTER, or "catch up", to rich countries. Happens as they adopt the production and technologies of the richest countries |
| sustained growth | some countries experience positive and relatively steady growth rates over 50, 100, and even 200 yr periods |
| Solow growth model | Y= A*F(K,H) Y=GDP K=physical capital H= human capital (total eff. units of labor) A= level of technology Increasing K,H, or improving A can increase Y(GDP) |
| WHAT DRIVES PHYSICAL CAPITAL ACCUMULATION (K) | through investment (I) in a process called physical capital accumulation K now = K last yeat - K depreciated +I |
| what determines aggregate saving | individual households decided how much of their income they consume and how much they save. Consumption brings immediate happiness, while saving, leads to future consumption and thus future happiness |
| steady state equillibrium | an economic equilibrium in which the physical capital stock remains constant over time |
| Steady state level GDP increase | can be caused by... increase in saving rate, s increase in stock of human capital, H |
| what doesn't generate Sustained growth | physical capital accumulation its self cannot generate sustained growth due to diminishing marginal product of physical capital. Same applies to population growth and education themselves. These things create smaller increases in GDP over time |
| Sustained growth source | technological progress, A. technological progress raises productivity and human capital to create more output so it leads to sustained increase or growth in real GDP |
| technological change | the process in which new tech and new goods and services are invented, introduced, and used in the economy; enabling the economy to achieve a higher level of GDP for given levels of physical capital stock, K, and total eff. units of labor, H. |
| more technological change | it is exponential because new innovations and technologies build on the existing stock of knowledge. |
| saving rate | fraction of total income that households save |
| factors that help households decide whether to consume or save their income | interest rate, expectation about taxes, expectations of future income growth |
| Investment (I) | flow of new investment |
| WHAT DETERMINES AGGREGATE SAVINGS (S) | individual households as they determine their level of consumption and therefore the rate of saving |
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