Questions and Answers
What does Classical Growth Theory suggest happens when real GDP per person rises above the subsistence level?
What is meant by the subsistence real wage rate?
The minimum real wage rate needed to maintain life.
With real GDP per person above the subsistence real GDP per person, the population decreases.
False
The increase in population increases capital per hour of labor.
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When does the decrease in capital per hour of labor stop?
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The improvement in technology permanently increases real GDP per person.
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What is a problem with the classical theory?
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Study Notes
Classical Growth Theory
- Real GDP growth is viewed as temporary; it tends to revert to the subsistence level due to population dynamics.
- When real GDP per person exceeds the subsistence level, a population explosion occurs, leading to a decline in GDP per person back to subsistence.
Subsistence Real Wage Rate
- Defined as the minimum wage rate necessary to sustain life.
- It establishes the subsistence level of real GDP, influencing economic conditions.
Population Growth Dynamics
- An increase in real GDP per person above the subsistence level triggers population growth.
- This growth affects economic output and resource allocation.
Impact of Population on Capital
- Growth in population reduces capital available per hour of labor, negatively impacting productivity.
- As a result, real GDP per person decreases due to diminished capital resources.
Convergence to Subsistence Level
- The reduction in capital per labor hour continues until real GDP aligns with the subsistence level.
- Population growth halts once real GDP reaches this threshold.
Technology's Role
- Technological improvements do not lead to a permanent rise in real GDP per person.
- Instead, these advances often result in increased population size and reduced capital availability for labor.
Critique of Classical Theory
- A notable flaw in classical growth theory is its assertion that population growth is unaffected by the economic growth rate.
- This perspective overlooks the complexities of the relationship between economic conditions and demographic changes.
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Description
This quiz focuses on Classical Growth Theory as discussed in Chapter 23. Learn key concepts such as the relationship between real GDP growth, subsistence levels, and population dynamics. Test your understanding of these foundational economic principles.
