ECON 202 Chapter 12: Production and Growth — Key Concepts (Mankiw 10th Edition)

A set of flashcards covering productivity, determinants of growth, the production function, policy tools, and key growth concepts from the chapter.

What is productivity (Y/L) and why is it a key determinant of living standards?

Productivity is the quantity of goods and services produced from each unit of labor; it is the key determinant of living standards because higher productivity raises real GDP per person.

What does the production function Y = A × F(L, K, H, N) illustrate?

Output depends on labor (L), physical capital (K), human capital (H), natural resources (N), and the level of technology (A).

What does 'A' represent in the production function?

The level of technology; improvements in A shift the production function upward and allow more output from given inputs.

Name the four inputs in the production function discussed.

Labor (L), physical capital (K), human capital (H), natural resources (N).

What are constant returns to scale?

If all inputs are increased by the same percentage, output increases by that same percentage. Example: doubling all inputs yields 2Y, i.e., 2Y = A × F(2L, 2K, 2H, 2N).

How is productivity per worker (Y/L) related to inputs and technology?

Y/L = A × F(1, K/L, H/L, N/L); productivity depends on the level of technology and on capital, human capital, and resources per worker.

What is 'K/L' a measure of?

Physical capital per worker.

What is 'H/L' a measure of?

Human capital per worker.

What is 'N/L' a measure of?

Natural resources per worker.

What does 'Y' represent in the production function?

Total output; real GDP.

What does 'L' represent in the production function?

Labor.

What does 'K' represent in the production function?

Physical capital (machines, buildings, etc.).

What does 'H' represent in the production function?

Human capital (education, skills).

What does 'N' represent in the production function?

Natural resources (land, minerals, etc.).

What is the catch-up effect?

Poorer countries tend to grow faster than richer ones because they start with lower capital per worker, leading to convergence.

Investment from abroad – what are the two main forms?

Foreign direct investment (FDI) and foreign portfolio investment (FPI).

What is Foreign Direct Investment (FDI)?

Capital investment that is owned and operated by a foreign entity.

What is Foreign Portfolio Investment (FPI)?

Investment financed with foreign money but operated by domestic residents.

What are the benefits of investment from abroad for poor countries?

Increases the economy’s capital stock, raises productivity and wages, and brings in new technologies, which is especially helpful for countries with limited saving.

Why is education considered an investment in human capital?

It increases workers’ knowledge and skills, raises wages and productivity, and confers positive externalities; subsidies like public education help fund it.

What is the opportunity cost of education?

Wages forgone while attending schooling.

How does health and nutrition affect productivity?

Healthier workers are more productive; increases in caloric intake and nutrition have historically contributed to growth (e.g., S. Korea; Britain’s growth linked to nutrition according to Fogel).

What are the vicious and virtuous circles in health and growth?

Vicious circle: poverty → poor health → low growth; Virtuous circle: faster growth → better health → further growth.

What is the role of property rights and political stability in growth?

Protecting property rights and ensuring political stability support the price system, enforce contracts, and reduce uncertainty, enabling investment and growth.

What is the difference between inward-oriented and outward-oriented trade policies?

Inward-oriented policies restrict trade to protect domestic industries; outward-oriented policies promote integration with the world economy and free trade.

Why is knowledge considered a public good, and how is it supported by policy?

Ideas can be shared freely, increasing productivity for many; policy supports R&D through patent laws, tax incentives, and funding for basic research.

What are common tools to promote technological progress?

Patent laws, tax incentives or direct government support for private-sector R&D, and grants for basic research at universities.

How does population growth affect growth, per the chapter?

More workers can boost output and demand, but can stretch natural resources and dilute capital per worker; technology and innovation can counterbalance; higher population can also drive more scientists and progress.

What is diminishing returns to capital?

As capital per worker rises, the extra output from an additional unit of capital falls, making long-run growth require other growth drivers like technology.

What does the catch-up effect imply about poorer countries like Korea vs. the U.S. in 1960–1990?

Korea’s higher investment in capital per worker led to rapid growth and convergence toward richer economies.

What does the chapter say about the long-run growth potential due to future innovations in the U.S. and Western Europe?

It suggests future innovations may not be as transformational as those of the past, potentially leading to slower per-capita growth than in the past.

Suppose a country significantly increases its physical capital (K) per worker while other inputs (L, H, N, A) remain constant. Based on the production function, what is the expected impact on productivity (Y/L), and why might this impact eventually diminish?

Initially, increasing K/L will raise Y/L. However, due to diminishing returns to capital, the extra output from each additional unit of capital (K) will eventually fall, meaning the growth in Y/L will slow down unless other factors like 'A' (technology) also improve

A developing nation seeks to boost its long-term economic growth by improving human capital. What specific policies could the government implement, and how do they contribute to this goal?

The government could implement policies such as: 1. Public education subsidies: To increase workers' knowledge and skills. 2. Healthcare initiatives: To ensure healthier workers, who are more productive. Both directly raise human capital (H) and therefore productivity (Y/L).

Imagine a poor country with limited domestic savings. How would encouraging both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) specifically help this country grow, drawing on the concepts mentioned?

Both FDI and FPI increase the economy's capital stock (K), which raises productivity and wages. FDI is especially beneficial as it brings in new technologies and management expertise by being owned and operated by a foreign entity. FPI also adds capital but is managed by domestic residents.

A country is debating between adopting an inward-oriented trade policy or an outward-oriented trade policy. Using insights from economic growth, explain which policy would likely lead to higher long-term productivity and why.

An outward-oriented trade policy would likely lead to higher long-term productivity. These policies promote integration with the world economy and free trade, allowing a country to specialize in production, benefit from economies of scale, and gain access to new technologies and ideas, thus enhancing overall efficiency and growth. Inward-oriented policies, by restricting trade, tend to isolate domestic industries, making them less competitive and innovative.

Why might South Korea, a country that started with low capital per worker, experience a much faster rate of economic growth than the United States between 1960 and 1990, according to the 'catch-up effect'?

The 'catch-up effect' states that poorer countries tend to grow faster than richer ones because they start with lower capital per worker (K/L). As South Korea invested heavily in increasing its K/L, each additional unit of capital yielded a larger increase in output compared to a country like the U.S. which already had abundant capital, leading to more rapid growth and convergence.