Macro - Long-Run Economic Growth

What is productivity?

the average quantity of g&s produced per unit of labor input

What does Y equal?

Y = real GDP = quantity of output produced

What does L equal?

L = quantity of labor

What is the formula for productivity?

Productivity = Y/L (output per worker)

What is productivity so important?

When a nation’s workers are very productive, real GDP is large, and incomes are high.

When productivity grows rapidly, so do living standards

What is K?

K is the stock of equipment and structures used to produced g&s called [physical] capital

What does K/L equal?

K/l = capital per worker

What is the correlation between K/L and Y/L?

An increase in K/L causes an increase in Y/L

What happens to productivity when there is more capital?

Productivity is higher when the average worker has more capital (machines, equipment, etc)

What is human capital (H)?

the knowledge and skills workers acquire through education, training, and experience

What does H/L equal?

H/L = the average worker’s human capital

What happens to productivity when there is more human capital?

Productivity is higher when the average worker has more human capital (education, skills, etc)

What is the correlation between H/L and Y/L?

An increase in H/L causes an increase in Y/L

What is technological knowledge?

society’s understanding of the best ways to produce g&s

What is technological progress?

An advance in knowledge that boots productivity (allows society to get more output from its resources)

How can we boost productivity?

We can boost productivity by increasing K, which requires investment

foreign direct investment

a capital investment (a factory) that is owned and operated by a foreign entity

foreign portfolio investment

a capital investment financed with foreign moeny but operated by domestic residents

What is the effect of education on wage?

In the U.S., each year of schooling raises a worker’s wage by 10%

what are institutions?

the “rules of the game” that structure economic incentives

What are the 4 institutions of Economic Growth?

1. Property rights

2. Honest government

3. Political stability

4. A dependable legal system

Inward-oriented policies

aim to raise living standards by avoiding interaction with other countries (tariffs, limits on investment from abroad)

outward-oriented policies

promote integration with the world economy (the elimination of restrictions on trade or foreign investment)

Countries with inward-oriented policies have generally ____ to create growth

• FAILED

• Example: Argentina during the 20th century

Countries with outward-oriented policies have often ____

• SUCCEEDED

• Examples: South Korea, Singapore, Taiwan after 1960

What is the main reason why livings standards rise over the long run?

Technological progress

What is one reason why knowledge is a public good?

Ideas can be shared freely, increasing the productivity of many

What are some policies to promote R&D?

• Patent laws

• Tax incentives or direct support for private sector R&D

• Grants for basic research at universities