Global Inequality and Economic Growth Flashcards

This set of vocabulary flashcards covers key concepts of global inequality, the Solow Growth Model, and various economic traps as discussed in the Week 12 lecture.

Real GDP per capita

The amount of output per head in a country, calculated as $\text{Real GDP per capita} = \frac{\text{Real GDP}}{\text{Population}}$. It is often considered the average income but does not account for income distribution.

International dollars

A hypothetical currency used to compare living standards across countries. It is adjusted for inflation over time and for differences in the cost of living (Purchasing Power Parity) so that one unit can buy the same quantity and quality of goods anywhere.

Economic growth

The increase in the production of goods and services over time. It is not fundamentally about money, but about the output created through labor, capital, and technology.

Production Technology

The process or knowledge used to combine Capital ($K$) and Labour ($L$) to produce Output ($Y$). Improvements in this area allow for more output to be produced with the same amount of inputs.

Capital-labour ratio ($k$)

The amount of capital per unit of labour, expressed as $k = \frac{K}{L}$. A higher ratio generally leads to higher per capita output ($y$).

Per capita output function ($$y = f(k)$ defiance)

A model showing that per capita output depends on the capital-labour ratio. The graph slopes upwards but becomes flatter (diminishing returns) as the capital-labour ratio increases.

Maintenance line

The amount of per capita investment required to maintain the current capital-labour ratio, expressed by the formula $(n + \delta)k$, where $n$ is the population growth rate and $\delta$ is the depreciation rate.

Steady-state capital-labour ratio ($k^*$)

The point where the saving line ($s \cdot f(k)$) intersects the maintenance line ($(n + \delta)k$). At this point, the capital-labour ratio remains constant over time because investment exactly matches depreciation and population growth.

Convergence

The economic theory that countries with a lower initial capital-labour ratio will grow faster and eventually catch up to richer countries as they move toward the steady-state.

The Golden Rule

The specific saving rate that maximizes per capita consumption at the steady-state. This occurs where the tangent to the output line is parallel to the maintenance line.

Middle-income trap

A situation where a country's growth slows down after achieving initial success through capital accumulation, often because it fails to foster an environment for innovative business or technological growth.

Malthusian Trap

A poverty trap named after Thomas Malthus where improvements in economic conditions are diluted by a resulting increase in the population growth rate ($n$), leading to lower steady-state per capita output.

Institutional factors

Non-mathematical drivers of growth such as property rights, legal institutions, and financial markets. Weak institutions or wars can discourage investment and hamper economic development.

Security of property rights

An institutional measure often positively correlated with income per capita; countries where people are more likely to lose possessions to expropriation tend to have lower levels of income.

Capital accumulation formula

The equation determining the change in the capital-labour ratio over time: $k_{t+1} - k_t = s \cdot f(k_t) - (n + \delta)k_t$.