Chapter 10-Economic Growth

What was a key consequence of the invention of agriculture?

People were able to settle into communities and form societies, but most still worked long hours in agriculture and faced frequent starvation and malnutrition

What describes the general living conditions for most people from 1 million B.C. through 1200 A.D.?

Most people lived in grinding poverty, with each successive generation as poor as the previous, though some rulers and regions, like ancient Greece, enjoyed wealth

What does historical evidence suggest about GDP per person from 1 million B.C. to the early 1800s?

GDP per person was roughly $200 per year in today’s dollars for most of this period, stayed nearly constant until around 1200 A.D., grew very slowly afterward, and took roughly 600 years to double by the early 1800s

At the start of the 1800s, world GDP per person was roughly $400 in today’s dollars. What does this suggest about living conditions at that time?

People had to survive on very little, with only about $400 worth of goods and services per year, adjusted for today’s prices, making life extremely difficult for most individuals

What key changes in agriculture and markets led to improvements in living standards by the 1800s?

Better crop rotation, farm enclosures, higher-yield crops, new equipment, and improved transport reduced hunger and allowed fewer people to work on farms

How did increased agricultural productivity contribute to the Industrial Revolution?

Fewer resources were needed for food, freeing people to pursue other activities, which led to inventions like the steam engine, sewing machine, telephone, and light bulb

What was the impact of machines and industrial investment on global GDP per person?

Machines and factories greatly increased what people could produce, leading to rapid income growth and multiple doublings of global GDP per person from the 1800s to the 2000s

What does economic growth allow people to do?

Produce and consume more, reducing hunger, improving housing and sanitation, and providing more resources for health and education, enabling people to live and thrive

Why do large differences in income and life expectancy still exist between countries today?

Because the agricultural and industrial revolutions didn’t lead to economic growth everywhere; some countries thrived, others stagnated, and some started well but lost their way

How did the Industrial Revolution affect global GDP growth and economic disparities?

Small differences in growth rates compounded over hundreds of years, leading to much faster GDP growth in Western Europe and North America, while slower-growing regions like Africa fell further behind

What do the facts about economic growth over the past 200 years reveal?

The global economy has grown enormously, transforming quality of life, but growth has been uneven, creating large disparities in average income between countries

What does a production function describe?

The methods by which inputs are transformed into outputs, determining the total production possible with a given set of resources

How is a production function similar to a cookbook?

Like a cookbook, it provides instructions for combining available inputs in specific ways to produce a predictable amount of output, showing the relationship between resources and what is produced

How does a company’s production function relate to running a business?

It acts like a cookbook for management, showing how to combine people, skills, machinery, and raw materials in the right proportions to produce valuable output

How does the aggregate production function apply to the whole economy?

It relates total output (GDP) to the quantity of inputs employed across the economy, showing how resources combine to produce overall production

In a production function, what do L and H represent?

L represents labor, the number of workers, and H represents human capital, the skills and expertise workers bring to their jobs

What does human capital represent in a production function?

The skills, knowledge, and experience that workers bring to their jobs, which increase their productivity and the overall output of the economy

In a production function, what does physical capital (K) represent?

The tools, machinery, and structures used in production, which help workers produce goods and services more efficiently

What does the aggregate production function show?

It shows that using more inputs—labor, human capital, and physical capital—leads to more output, quantifying how additional inputs increase production

What equation is used for the Aggregate Product Function?

Y=f(L,H,K), where output Y depends on labor L, human capital H, and physical capital K

According to the aggregate production function, a country will produce more output if:

It employs more labor, its workers become more highly skilled (accumulating human capital), and it accumulates more physical capital

How does labor affect total output in the economy?

The more labor workers provide, the more output is produced, with total labor input measured as the sum of all hours worked across the economy

What factors determine the total quantity of labor input in the economy?

The size of the population, the fraction who are of working age, the share of working-age people who choose to work, and how many hours each worker puts in

What role does population play in determining GDP and living standards?

A larger population sets the upper limit for total labor and GDP, and faster population growth can boost economic growth, but it does not automatically increase GDP per person or living standards

When analyzing material living standards, what variables should we focus on?

GDP per person, hours worked per person, human capital per person, and physical capital per person

Why does the demographic structure of a population matter for labor input?

Because children and the elderly rarely work, so the working-age population determines the labor available for production

What does the dependency ratio measure, and why does it matter for economic growth?

It measures the number of people too young (under 18) or too old (65+) to work per 100 working-age people, and a higher ratio can slow economic growth by reducing the share of people available to work

What has been a key driver of the growth in the labor pool over the past century?

A larger share of the working-age population choosing to work, largely due to changing attitudes toward women in the workplace

How do hours worked affect GDP?

The more hours people work, the more GDP is produced, because total labor input increases with additional hours

What determines GDP besides the total hours worked?

How productive each worker is while at work, measured as output per hour, which economists call labor productivity

What does labor productivity depend on, and how is it related to human capital?

Labor productivity depends critically on human capital, which is the skills and knowledge workers develop through education, training, and practice

Why was education important for blue-collar workers during industrialization?

It enabled them to work with increasingly sophisticated machinery, boosting their productivity, contrary to the claim that education wouldn’t be useful

What is the estimated rate of return to postsecondary education, and why do employers pay more for it?

Each additional year of postsecondary education raises earnings by about 10% and can increase lifetime earnings by over $1 million because the skills learned enable workers to produce more output

What is the capital stock?

The total quantity of physical capital, including all equipment and structures used in the production of goods and services

How should physical capital be viewed in relation to labor?

Physical capital is best viewed as a complement to labor, helping workers produce more output efficiently

How do machines affect labor and productivity?

Machines complement labor by allowing workers to produce more output in the same amount of time

What does the story of the electric light bulb illustrate about technological progress?

Technological progress can dramatically reduce the labor needed to produce goods, lowering costs and transforming daily life, as seen with the electric light bulb and modern LEDs

A country’s output depends on, available inputs. This can include which of the following?

Labour input, human capital, physical capital, and also recipes for transforming inputs into output

What does constant returns to scale mean in economics?

Increasing all inputs by a certain proportion increases output by the same proportion

The replication argument helps explain constant returns to scale because it shows that:

Doubling all inputs by opening an identical second factory will double total output

Which statement best describes constant returns to scale?

If all inputs are doubled, total output will also double

What happens to output if a firm doubles only its physical capital while keeping labour unchanged?

Output increases, but by less than double the original amount

What does the law of diminishing returns state?

When one input is fixed, adding more of another input eventually increases output by smaller amounts

According to the law of diminishing returns, what happens when the number of workers and technology are fixed, and a firm keeps adding more physical capital?

Each additional unit of capital raises output by a smaller amount than before

What does the law of diminishing returns imply when one factor of production is held constant?

Each added unit of another input raises output by a smaller amount than the previous one

What does the principle of diminishing returns to physical capital imply about differences between rich and poor countries?

Extra capital raises output less in capital-rich countries than in capital-poor ones

What explains South Korea’s rapid economic growth from 1970 onward?

Starting with low capital per person, South Korea invested heavily in machines, factories, and equipment, generating rapid output growth through catch-up

What is catch-up growth?

Rapid economic growth that occurs when a relatively poor country invests in capital and adopts existing technologies

How does a country’s capital stock change over time?

It grows through investment in new equipment and structures but shrinks due to depreciation of existing capital

Why can sustained rapid growth from capital accumulation eventually slow down?

Rising depreciation means more capital wears out each year, and diminishing returns mean each additional unit of capital adds less to output and investment

What happens when an economy reaches its steady state?

The capital stock stops growing because new investment only replaces depreciated capital, and output growth also stops without new technology or more skilled workers

What does capital accumulation explain, and what does it fail to explain?

It explains rapid growth in poor countries as they catch up to rich countries, but it cannot explain sustained growth in already rich countries like Canada, the U.S., and much of Europe

What is the key to sustained economic growth?

Technological progress, which provides new production methods that allow businesses to produce more output from the same inputs

What drives technological progress and sustained economic growth?

How quickly new ideas are created and how many resources are devoted to generating new ideas, balancing short-run output with long-run innovation

Why was the agricultural revolution a key catalyst for sustained economic growth?

Improvements in agriculture freed people from producing just food, allowing them to pursue new ideas that led to the Industrial Revolution and ongoing economic growth

Why can idea-driven economic growth be sustained over the long run?

Ideas can be freely shared, do not depreciate with use, and may promote the creation of additional ideas, creating a self-reinforcing cycle of growth

Why do businesses tend to underinvest in generating new ideas, and how can this problem be addressed?

Ideas are often nonexcludable, so firms may earn less profit if others copy their innovations, leading them to invest less than is socially optimal; intellectual property laws can encourage more innovation

Why do some countries fail to grow even if they have similar amounts of capital?

Because the efficiency of allocating workers, skills, and physical capital depends on institutions and government, which affects overall productivity

Why are well-defined property rights important for economic growth?

They clarify who controls a resource, reduce disputes, and provide incentives for people to work hard because their rights will be respected

What lesson about property rights can be drawn from sharing household resources with siblings?

Clear rules and enforcement ensure that people can use resources without conflict, providing incentives to work hard and respect ownership

Why are government regulations important for starting a business?

They ensure that businesses operate safely and responsibly, giving customers confidence while allowing new ventures to start quickly

Why is it often harder to start a business in poorer countries?

Excessive red tape, government corruption, and weak enforcement of property rights reduce incentives to invest and innovate, keeping countries poor

What role do institutions and government play in economic success?

Clear property rights, a trusted legal system, and well-designed regulations support entrepreneurship and a well-functioning market economy

Which institutions are important for promoting economic growth?

Property rights, government stability, efficient regulation, and government policies that encourage innovation

How can government policy support the development of new ideas?

By creating property rights around ideas and subsidizing their creation to encourage innovation

How do intellectual property laws encourage innovation?

They give inventors and creators exclusive rights to their ideas, ensuring others must pay to use them, which preserves the benefits of innovation

Why do patents give inventors an incentive to innovate, and what is the policy trade-off?

Patents grant temporary monopoly rights, allowing high profits that encourage innovation, but the government must balance this against the cost to consumers of high prices

How can the government encourage innovation?

By establishing intellectual property laws and providing subsidies for research and development