W14: causes of economic growth in the long run; saving investment ; the role of financial institutions

standard of living differences

developed countries (high-income) Developing countries (low-income)

purchasing power parties

measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies

Real GDP growth

indicates economic progress

productivity

the quantity of goods and services produced from each unit of labor input

productivity factors

Physical capital per worker( stock of equipment& structures), Human capital( knowledge &skills) , natural resources per worker( inputs into production proved by nature )

economic growth & public policy

Investment is needed for the production of new capital

saving reduce consumption

diminishing returns

as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain at a constant.

as stock of capital rises

the extra output produced from an additional unit of capital falls

catch up effect

bc of the diminishing returns countries that start off poor tend to grow more rapidly than countries that start off rich

→ observation that underdeveloped economies tend to grow more rapidly than wealthier economies.

→ the less wealthy economies literally catch up to the more robust economies

Foreign Direct Investment

capital investment that is owned and operated by a foreign entity → most effective for developing countries-. overall very good

education

Higher education leads to higher productivity ( positive externality)

Brain drain

emigration of many of the most highly educated workers from developing to rich countries

Human development index:

Index that tries to capture overall quality of life