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Which of the following factors is primarily related to the skills and knowledge of the workforce?
What is the term used to describe the average standard of living measured by real GDP per person?
Which factor focuses on innovations to improve production efficiency?
Which of the following factors enhances the appeal of starting new businesses?
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Which of these is NOT typically considered a factor driving long-run economic growth?
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What happens to savings when current income remains unchanged and consumption increases?
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Which factors directly influence the demand for loanable funds?
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What is the relationship between interest rates and the demand for loanable funds?
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What defines the real interest rate?
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How does crowding out occur in the economy?
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During which phase of the business cycle does production, employment, and income increase?
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Which of the following is NOT a factor influencing loanable fund demand?
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What does the Solow Growth Model predict about GDP per capita in poorer countries?
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What is the key determinant of economic growth in New Growth Theory?
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According to Creative Destruction, what role do entrepreneurs play in economic growth?
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If real GDP increases from $10,000 billion to $11,000 billion, what is the growth rate of real GDP?
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What must increase faster than population to raise the standard of living?
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What is the formula to calculate the investment in a closed economy given Y, C, TR, and G?
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Why does the demand for loanable funds slope downward?
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What indicates a decrease in the profitability of new investment according to economic theory?
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In the context of New Growth Theory, what does 'knowledge capital' refer to?
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What is the primary role of financial intermediaries?
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Which equation represents the relationship between saving and investment in a closed economy?
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What does a balanced budget imply about public saving?
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How does savings contribute to job creation?
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What does the term liquidity refer to in a financial context?
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What is the formula for calculating the growth rate of real GDP?
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What happens when public saving is less than zero?
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Why is capital formation important for economic growth?
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Using the Rule of 70, how long will it take for a country's GDP growing at 4% per year to double?
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Which statement best describes the market for loanable funds?
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If you want to double your money in 14 years, what should the growth rate be according to the Rule of 70?
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Which of the following factors can increase Potential GDP?
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How long would it take for a population growing at 1.4% annually to double?
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How does the financial system primarily benefit firms?
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If a resource is depleting at a rate of 6% per year, how long will it take for that resource to halve?
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What is the impact of small differences in growth rates on the standard of living?
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Study Notes
Long-Run Economic Growth
- The process of increasing average standard of living by rising productivity.
- Real GDP per capita is the best measure of the standard of living.
- Factors driving long-run economic growth:
- Physical capital
- Human capital
- Technological advancements
- Natural resources
- Institutional factors
- Entrepreneurship
- Trade and Globalization
- Research and Development
Growth Rate
- The growth rate of real GDP or real GDP per capita in a year is the percent change from the previous year.
Rule of 70
- The rule of seventy is a way to estimate the number of years to double a variable using the growth rate.
- The rule of seventy applies to any variable such as GDP, population, and investment returns.
Potential GDP
- The level of real GDP attained when all firms are producing at capacity.
- The potential GDP increases when the labor force, capital stock grows, and technological change occurs.
Financial System
- The system of financial markets and financial intermediaries through which firms acquire funds from households.
- The financial system channels funds from savers to borrowers and channels the returns on the borrowed funds back to savers.
Financial Markets
- Places where financial securities, such as stocks and bonds, are bought and sold.
Financial Intermediaries
- Firms such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.
Financial Security
- A document which states the terms under which funds pass from the buyer of the security to the seller.
Liquidity
- The ease with which a form of financial security can be exchanged with another without reducing its value.
Saving & Investment
- In a closed economy, investment is equal to income minus consumption and government purchases.
- Savings are equal to income plus transfer payments minus consumption and taxes.
- Private saving is income plus transfer payments minus consumption and taxes.
- Public saving is taxes minus government purchases minus transfer payments
- Total saving is equal to private saving and public saving, which is also equal to investment.
Saving and Investment
- A balanced budget means public saving is zero.
- A budget deficit means public saving is less than zero (dissaving).
- A budget surplus means public saving is greater than zero.
Importance of Saving and Investment for Economic Growth
- Capital formation: Savings provide funds for investment.
- Technological progress: Investment often involves the adoption of new technologies.
- Job Creation: Investment projects create jobs.
- Increase in Income: Investments yield returns, leading to increased income.
- Stability and Confidence: High savings can provide economic stability and confidence.
Market for Loanable Funds
- The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.
- If current income remains unchanged and consumption increases, the amount saved will decrease.
Loanable Funds Market
- The demand for loanable funds originates from firms and households that wish to make real investments.
- The demand for loanable funds is downward sloping because as the real interest rate rises, the number of profitable investment projects that firms can undertake will decrease, leading to a smaller quantity demanded of loanable funds.
Factors Shift Loanable Fund Supply
- Changes in government budget deficits.
- Changes in the expected rate of return on investment.
- Changes in household wealth.
Nominal vs Real Interest Rate
- Nominal interest rate: Stated interest rate on a loan.
- Real interest rate: Corrects the nominal interest rate for the inflation effect which is equal to the nominal interest rate minus the inflation rate.
Increase in Profitability in Investment
- An increase in the profitability of investments will shift the demand for loanable funds curve to the right, leading to a higher real interest rate and a greater quantity of loanable funds.
Increase in Government Budget Deficit
- An increase in the government budget deficit shifts the supply of loanable funds curve to the left, leading to a higher real interest rate and a lower quantity of loanable funds.
Crowding Out
- Crowding out refers to a decline in investment spending due to an increase in government purchases.
- The government borrowing more can cause higher interest rates, increasing costs for private entities.
- Increased government spending uses up resources that would have gone to the private sector.
Business Cycle
-
Expansion phase
- Production increase
- Employment increase
- Income increase
-
Recession phase
- Production decline
- Employment decline
- Income decline
Solow Growth Model
- Does not seek to explain technological change.
- Technological change is treated as the result of chance scientific discovery.
New Growth Theory
- Paul Romer.
- Emphasizes that technological change is influenced by economic incentives and is determined by the working of the market system.
- Accumulation of knowledge capital is a key determinant of economic growth.
- New knowledge is a public good, allowing it to be used at low or no cost.
- Increasing returns to knowledge at the level of the national economy.
Creative Destruction
- Joseph Schumpeter.
- The entrepreneur is central to economic growth.
- Profits of entrepreneurs provide the incentive for bringing together factors of production in new ways.
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Description
Explore key concepts related to long-run economic growth, including the significance of real GDP per capita, growth rates, and potential GDP. Understand the various factors that drive economic growth and how the Rule of 70 helps estimate growth impacts. Test your knowledge on this essential economic topic.
