Economic Growth 1 - The Facts to be Explained Flashcards Preview

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Flashcards in Economic Growth 1 - The Facts to be Explained Deck (43)
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1
Q

Comparing wealthy countries today to their own history, there is an immense difference in living standards. How so?

A

The apparent growth in material wealth has been accompanied by a sharp reduction in the amount of work that people have to do.

2
Q

What kind of differences between countries will we be examining throughout this book?

A

Differences in their levels of income.

Differences in their growth rate of income.

3
Q

In what way is there is a close link between the two measures of income?

A

Countries that are rich today are precisely those that have growth quickly and for a longer period of time in the past.

4
Q

In beginning our examination of differences in economic status among countries, what will out focus be on?

A

GDP.

5
Q

What is GDP?

A

The measure of the value of all the goods and services produced in a country in a year,

6
Q

How can GDP be calculated?

A

Either the value of the output produced in a country or equivalently as the total income, in the form of wages, rents, interest, and profits, earned in a country.

7
Q

What else is GDP commonly called?

A

Output or National Income.

8
Q

What are some problems with GDP as a measurement?

A

Many aspects of economic well-being are not measured by GDP, and there are serious conceptual and practical problems in measuring and comparing GDP across countries or in a single country over time.

9
Q

Which issue do we face when comparing two different countries GDP’s?

A

How to deal with their different currencies.

10
Q

Which issue do we face when comparing a single country’s GDP over time?

A

Fluctuations in the price level.

11
Q

What do we use to convert amounts (of GDP) from other years and countries?

A

We use a set of artificially constructed factors called Purchasing Power Parity (PPP) exchange rates.

12
Q

GDP per capita seems to be the ideal measure for comparisons. How could GDP per capita not always be the correct measure to use? give the first example.

A

The ruler of a country might care about how much tax can be collected and so might be concerned about the total size of national income, not income per capita.

13
Q

GDP per capita seems to be the ideal measure for comparisons. How could GDP per capita not always be the correct measure to use? give the second example.

A

If we are interested in how large an army can be raised, the total population might be more relevant than total income.

14
Q

Why are differences in the rate of income growth among countries important?

A

Because a country that grows faster will move to a higher level of income over time.

15
Q

What’s often used when looking at data on income growth over long periods of time?

A

A ratio scale.

16
Q

What’s the expression for a growth rate?

A

g = ( X(t+1) - X(t) ) / X(t)

17
Q

What’s the expression for something that’s been growing at a constant rate for n years?

A

X(t+n) = X(t)(1+g)^n

18
Q

What’s the expression to find growth rate from information on number of years, n, X(t+n), and X(t)?

A

g =( (X(t+n) / X(t))^(1/n) )- 1

19
Q

Describe a ratio scale.

A

On a ratio scale, equal spaces on the vertical axis correspond to equal proportional differences in the variable being graphed.
Ex: Gap between 1 and 10 is the same as gap between 10 and 100.

20
Q

Describe a linear scale.

A

On a linear scale, equal spaces on the vertical axis correspond to equal differences in the variable being graphed.

21
Q

How should one interpret a straight line on a ratio scale?

A

On a ratio scale, a straight line represents a quantity growing at a constant rate.

22
Q

What is a useful mathematical approximation for dealing with growth rates?

A

The rule of 72.

23
Q

What is the rule of 72?

A

A formula for estimating the amount of time it takes something growing at a given rate to double.

Doubling time = 72/g

24
Q

What’s a downside in separating trend growth from business cycles?

A

Although it’s relatively easy to separate trend growth from business cycles when we are looking at historical data, it is much more difficult to figure out what is going on in real time.

25
Q

How can differences between countries be compounded over time?

A

Just as growth in a single country compounds over time to result in a large increase in income, differences in average growth rates between two countries will translate over time into differences in countries’ relative levels of income.

26
Q

What are two aspects of growth before 1820.

A
  • Growth was glacially slow.
  • Income differences among countries were very small by modern standards there was even less inequality among countries than in 1820.
27
Q

Is income inequality in the world a result of within-country-income inequality or between-country inequality?

A

Both.

28
Q

In the world today, which is more important source of inequality, Within-country or between-country?

A

Between country inequality explains 60% of overall world inequality.

29
Q

In addition to being an important determinant of variation in world income, what’s the first reason why we can’t forget about within-country inequality even though between-country inequality accounts for the majority of world inequality today?

A

The degree of income inequality within a country may itself be an important determinant of that country’s economic success, and thus may affect the average level of income.

30
Q

In addition to being an important determinant of variation in world income, what’s the second reason why we can’t forget about within-country inequality even though between-country inequality accounts for the majority of world inequality today?

A

When we consider what aspect of their income people care most about, it may well be that where they stand relative tot he people in their own country (those with whom they compare themselves) is more important than where their country stands relative to other countries.

31
Q

What is the equation for the mean logarithmic deviation?

A

(1/n)Σln(x’/xi) from 1 to n

where x’ is the mean value of x and n is the number of observations.

32
Q

Economists studying economic growth rely heavily on estimates of GDP. In addition to many well-known conceptual problems with GDP, there are more mundane problems with this data. Like what? (5)

A
  • Some economic activity (i.e., the black market) is deliberately hidden, whereas in other cases officials simply fail to notice it.
  • Sometimes data from a small sample of productive units is used to estimate output for large sectors of the economy.
  • Governments occasionally engage in deliberate falsification.
  • During times of political turmoil, data collection can cease all together.
  • Errors can creep in via the PPP adjustments.
33
Q

For the previously mentioned 5 reasons, it’s useful to check measured GDP against other sources of data, when they are available. What is one unconventional form of data?

A

The amount of light that is visible at night from outer space.

34
Q

Why are night-time lighting levels a useful indicator of development?

A

Light leaks into space from houses, workplaces, cars, and other places where people are active at night. Not surprisingly, richer countries tend to produce more light.

35
Q

How does income per capita compare to income per capita 200 years ago in the richest countries?

A

Income per capita today is at least 10 times as large as it was 200 years ago.

36
Q

When it comes to comparing GDP in different countries, each with its own currency, it would at first seem that we do not have to go through the difficulty of creating a price index - that we could just use the exchange rate. What’s the first reason this is inaccurate?

A

Market exchange rates fluctuate daily, often by a large amount. If we used these fluctuating exchange rates, we’d have to conclude that one country suddenly became richer and the other poorer.

37
Q

When it comes to comparing GDP in different countries, each with its own currency, it would at first seem that we do not have to go through the difficulty of creating a price index - that we could just use the exchange rate. The second, more subtle reason this is inaccurate arises from the interaction of two facts. What’s the first?

A

-The price of goods traded in international markets, relative to goods that are not traded, tends to be much higher in poor countries than in rich countries.

38
Q

When it comes to comparing GDP in different countries, each with its own currency, it would at first seem that we do not have to go through the difficulty of creating a price index - that we could just use the exchange rate. The second, more subtle reason this is inaccurate arises from the interaction of two facts. What’s the second?

A

-Exchange rates tend to be such that the price of traded goods will be the same when these prices are converted to a common currency at the market exchange rate (law of one price, due to arbitrage)

39
Q

What’s the result of the law of one price and the difference between prices of traded vs non-traded goods?

A

Comparisons if GDP at market exchange rates systematically understate the relative income of developing countries.

40
Q

What are PPP exchange rates based on?

A

The prices of a standardized basket of goods and services (both traded and non-traded). The prices of the baskets in the two countries suggest a PPP exchange rate.

41
Q

Which exchange rate will we use throughout this book in making comparisons among countries?

A

PPP Exchange Rates.

42
Q

How does market exchange rate typically compare to PPP exchange rate for developing countries?

A

Developing countries typically have market exchange rates that are undervalued relative to PPP.

43
Q

What are PPP exchange rates useful for?

A

Comparing quantities other than GDP.

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