Economic Growth – Chapter 3 (Lecture Notes)

Flashcards covering key concepts from the notes on economic growth, potential GDP, labor productivity, growth theories, and policy implications.

What is economic growth?

A sustained expansion of production possibilities, measured as the increase in real GDP over a given period.

How do you calculate the Real GDP growth rate?

Real GDP growth rate = [(Real GDP in current year − Real GDP in previous year) / Real GDP in previous year] × 100.

What is the 'Magic of Sustained Growth'?

Sustained growth of real GDP per person compounds over time, transforming poor societies into wealthy ones.

What is the Rule of 70?

The approximate number of years for a variable to double is 70 divided by its annual growth rate.

What major trend did South Africa experience in growth between 1980–1992 and after 1994?

Negative growth due to sanctions (1980–1992) with a turnaround after the first democratic elections in 1994.

What does 'catch-up' mean in global income growth?

Whether poorer economies grow faster than richer ones, reducing the income gap over time.

What is Potential GDP?

The level of real GDP when the quantity of labour is at full employment, i.e., when resources are fully utilized.

What is the Aggregate Production Function?

The relationship showing how real GDP changes as the quantity of labour changes, holding all other influences constant.

What are the components of the Aggregate Labour Market?

Demand for Labour, Supply of Labour, and Labour Market Equilibrium (where there is neither shortage nor surplus).

What happens when there is labour market equilibrium?

There is neither a shortage nor a surplus of labour.

What two forces make Potential GDP grow?

Growth of the supply of labour and growth of labour productivity (the latter influenced by capital, human capital, and technology).

What factors change the quantity of labour?

Average hours per worker, employment-to-population ratio, and the working-age population.

What are the three main sources of labour productivity growth?

Physical capital growth, human capital growth, and technological advances (with human capital as fundamental).

What is the fundamental precondition for labour productivity growth?

An incentive system created by firms, markets, property rights and money.

What does Classical Growth Theory (Malthusian) claim?

Real GDP per person grows only temporarily; when above subsistence, population growth eventually brings it back to subsistence.

What do Modern-Day Malthusians argue?

We will run out of resources; real GDP per person may decline; climate change supports a lower standard of living.

What is Neoclassical Growth Theory (Solow model)?

Real GDP per person grows because technological change induces saving and investment that raise capital per hour of labour; growth ends if technological change stops due to diminishing returns.

What is The Neoclassical Theory of Population Growth?

The eighteenth-century population explosion ended; birth rate fell; population continues to grow but its rate slows.

What is the relationship between technological change and diminishing returns?

The pace of technological change influences growth, but growth does not determine the pace of technological change; tech progress is subject to diminishing returns.

What is a key problem with Neoclassical Growth Theory?

Assumes identical technologies and mobile capital across economies; convergence of growth rates is not always observed.

What is New Growth Theory (Romer)?

Real GDP per person grows because incentives drive ongoing invention and innovation; technological progress can persist indefinitely.

What is a Perpetual Motion Economy?

A view in New Growth Theory that the economy can sustain continuous growth as long as incentives for innovation exist.

How do New Growth Theory and Malthusian Theory view population differently?

Malthusian theory sees population growth as a problem; New Growth Theory sees population growth as part of the solution through ideas and human capital.

What are key policy recommendations for faster growth mentioned in the notes?

Stimulate saving to finance investment; stimulate R&D; improve the quality of education; provide international aid cautiously; promote international trade.

Why is trade openness emphasized over aid for growth?

Trade openness stimulates growth more reliably, and the fastest-growing nations are those most open to trade.