Chapter 7 - The relatively Recent arrival of economic growth

What’s the Industrial Revolution

The widespread use of power-driven machinery and the economic and social changes

How much percentage has the GDP growth per capita in the leading industrialized countries? 

2%

Rule of law

Vital to an economy working effectively and efficiently, leading to growth

Property rights

the rights of individuals and firms to own property

Contractual rights

Allow individuals to enter agreements with others regarding the use of their property

Why do we have a legal system that enforces contracts?

Business transactions are difficult, and economic growth would be slow

Labor productivity

the value that each employed person creates per unit of his or her input

Technological change

A combination of invention and innovation

Invention in technological change

Advances in knowledge

Innovation in technological change

putting those advances to use

What’s the first determinant of labor productivity?

human capital

What’s the second factor that determines labor productivity?

Technological change

What’s the third factor that determines labor productivity?

Economies of scale

Economies of scale

cost advantages that industries obtain due to size

Aggregate production function

the connection between inputs and outputs for the entire economy

What do the inputs include in the Aggregate production function?

Workforce, human capital, physical capital, and technology

What do the outputs include in the Aggregate production function?

GDP

What’s linked to the economy’s rate of productivity growth?

the growth rate of its GDP per capita

Is the economy’s rate of productivity growth and the growth rate of its GDP per capita identical?

No it is not identical

What happens if the percentage of the population with jobs in an economy increases?

GDP per capita will increase but productivity may not be affected

What’s the only way GDP per capita can grow long-term?

If the productivity of the average worker rises

What’s a common measure of US productivity per worker?

dollar value per hour that the worker contributes to the employer’s output

What’s the optimistic view of the new economy based on technological advancements?

It would generate higher average productivity growth for decades to come

What’s the pessimistic view of the new economy based on technological advancements?

Even with several years of productivity growth, it doesn’t prove that higher productivity will last for the long term.

Future GDP per capital formula

current GDP per capital x (1 + growth rate of GDP per capital)^years

Physical capital

the facilities and equipment that firms use

What is the physical capital also called?

infrastructure

What does more physical capital imply?

more output

What’s an example of an increase in the quantity of physical capital?

more computers of the same quality 

What’s an example of an increase in the quality  of physical capital?

same number of computers but the computers are faster

Human capital

the skills and knowledge that make workers productive

How are human capital and physical capital similar?

Investment now pays off in higher productivity in the future

What is technology the combination of?

invention andf innovation

What does technology comprise?

all the advances that make existing machines provide more and at a higher quality

Physical capital per person formula

physical capital/population

human capital per person formula

human capital/population

technology per person formula

technology/population

GDP per capital formula

Human capital per person + physical capital per person + technology per person

Capital deepening

When society increases the level of capital per person

What capital does capital deepening apply to?

Human and physical capital per worker

What’s the idea of human capital deepening?

years of experience that workers have

What are the important contributors to a healthy economic climate?

market economy and a legal system that governs and sustains property and contractual rights 

What involves market orientations at the microeconomic, individual, or firm decision-making level?

a healthy economy

What do markets that allow personal and business rewards and incentives for increasing human and physical capital encourage?:"

economic growth

What’s the government’s role in a healthy climate for economic growth?

correct when markets fail to properly allocate capital or technology

Convergence

pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

Low-income countries might have an advantage in achieving what?

greater productivity and economic growth in the future

What increases as the physical capital decreases?

marginal gains and the stock of the capital

Who do relatively old technologies benefit?

low-income countries

What are the benefits of a higher standard of living through growth?

people in low-income counties begin to enjoy a better living standard through growth

What would you expect if an economy’s growth opened only on the deepening of human and physical capital?

The economy’s growth rate is expected to slow down over the long run because of diminishing marginal returns

What does the slowness of convergence illustrate?

small differences in annual rates of economic growth, which become huge differences over time