Economic Growth
| 1. | What explains the long-run growth
of aggregate GDP?
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Growth of labor, capital, and
technology.
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| 2. | What is productivity? | Labor productivity is output per
unit of labor. Total factor productivity is output per average unit of all factors
of production.
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| 3. | What explains variations in labor
productivity?
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Variations in the capital-labor
ratio and variations in total factor productivity.
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| 4. | What explains variations in total
factor productivity?
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Technology, the degree of
competition, the legal and regulatory environment, political stability, education, etc.
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| 5. | Is it possible for an economy to
continue growing forever solely by accumulating more capital?
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No. | |
| 6 | How does an increase in the saving
rate affect economic growth?
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A higher saving rate does not
permanently affect the growth rate in the Solow model. A higher saving rate does
result in a higher steady-state capital stock and a higher level of output.
The shift from a lower to a higher steady-state level of output causes a temporary
increase in the growth rate. In some newer theories of growth, a higher saving rate
may permanently raise the rate of economic growth. These newer theories have not
been subjected to rigorous empirical testing, however.
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| 7. | How does an increase in the
population growth rate affect economic growth?
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In the Solow model, an increase in
the population growth rate raises the growth rate of aggregate output but has no permanent
effect on the growth rate of per capita output. An increase in the population growth
rate lowers the steady-state level of per capita output.
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| 8. | What explains the long-run growth of per capita GDP? | Technical progress, which in turn
stimulates growth of the capital stock.
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| 9. | Why do countries like the United
States, Germany, and Japan all seem to be converging to the same level of per capita GDP?
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They have similar technologies and are converging to similar per-capita stocks of capital. | |
| 10. | Why don’t all countries converge to the same level of per capita GDP as the United States, Germany, and Japan? | Some countries seem to have
different levels of technology (interpreted broadly to include factors like political
stability, the legal system, the security of property rights, the ability to enforce
contracts, etc.).
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| 11. | How does an increase in the tax rate on income from capital affect economic growth? | In the Solow model, the capital income tax rate has no permanent effect on the growth rate of output. An increase in the capital income tax rate lowers the saving rate, however. The effects of a change in the saving rate are discussed in question 3 above. |