27.1 Technical progress, investment in physical capital, and
investment in human capital.
27.2 Technical progress means more output can be produced with
the same quantities of capital, labor, and other inputs.
27.3 About half of real-GDP growth has resulted
from technical progress; the rest has
resulted from increases in capital and labor.
27.4 World economic growth in the 20th century was about 1.7% per year. (That was the average growth rate of real GDP
per person.)
27.5 You can make your own list. Mine
would include electric lights in their homes, indoor plumbing, sanitary sewer
systems, antibiotics, radio, television, automobiles, airplanes, recorded music
(records, tapes, CDs, DVDs); recorded videos; computers; plastic products (such
as plastic wrap, plastic containers, etc.), aluminum foil; refrigerators,
dishwashers, microwave ovens, teflon, velcro, etc. etc. etc.
These products resulted from a combination
of factors: investments in basic scientific research, investments in applied
science and engineering, and the ability of people to profit by making these
products and selling them to others.
27.6 Diminishing
return to capital means that the benefit of additional investment falls as the
capital-labor ratio rises; with more capital equipment per worker, the economy
gets a smaller benefit of investing in even more capital.
27.7 The steady state capital stock is the long-run equilibrium quantity of
capital per worker.
27.8 The basic model of economic growth says that investment raises the capital
stock over time, which raises real GDP, but
that diminishing returns to capital create a long-run equilibrium in which economic
growth stops. The equilibrium level of savings and
investment determines how fast the economy adds to its capital, so it
determines the equilibrium rate of economic growth. (Higher investment means
faster growth.) As the economy adds to its capital stock, the
demand for investment falls (because of diminishing returns to capital). This lowers the equilibrium real interest
rate over time.
The
main problems with the model are: (1) the evidence does not support the model's
prediction that long-term economic growth slows down over time; (2) the evidence
does not support the model's prediction that real interest rates
fall over time.
27.9 Economies are too complicated for this to
work effectively; too many changes occur at the same time in modern
economies.
27.10 A decrease in the willingness to save decreases the supply of loans. This has has two
effects. First, this lowers equilibrium investment
at any point in time, so the economy grows more slowly toward its long run
equilibrium. Second, it lowers the
steady-state capital stock and steady-state output per person. A lower level of savings supports a smaller level
of capital in the long run because it provides fewer resources for maintaining
that capital stock by replacing the capital that wears out each year.
27.11 Investment in human capital raises the economy's effective
labor input. (An economy's effective
labor input is its labor input adjusted for knowledge and skills.) Investment in human capital can prevent dimishing returns from causing economic growth to slow down
over time. Even increases in capital
over time raise capital per worker, capital per effective worker need
not change (think of effective labor increasing at the rate as the capital
stock), so diminishing returns need not reduce the
benefits of further investment and the rate of economic growth.
27.12 Some people say that economic growth will eventually fall, because we use some
resources that are fixed in supply, and some whose supplies are exhaustible. As world population continues to increase, the
amount of fixed resources per person will fall, which will reduce real GDP per
person. Exhaustible resources pose an
even greater problem, according to this view: even without population growth, exhaustible
resources are finite and we will eventually run out of them, reducing real GDP per
person. An alternative view is that people will solve
these problems in the future as they have in the past -- by developing substitutes
for resources that are fixed in supply or exhaustible, and by developing new
technologies that satisfy the same human wants in different ways.
27.13 A positive externality occurs when the social benefit of an action -- such as research -- exceeds its private benefit. Many economists believe that positive
externalities contribute to economic growth because each addition
to knowledge gives other people
new ideas to contribute even further to knowledge.
27.14 Suppose investments in knowledge and technical change had diminishing returns. Then, as people accumulate more knowledge and
technology, the
incentives to invest in further increases in knowledge and technology would
decrease. This would reduce the rate at
which the economy adds to its knowledge and technology. Eventually, they would stop increasing and
economic growth would stop.
27.15 Education levels, foreign investments, international trade,
political freedom, stable governments, and good government policies.
27.16 Foreign investment in an LDC provides resources for increases in capital, which
increases workers' productivity. It can
also provide new skills for workers, raising their productivity, and bring new
technology to a country, raising worker productivity in the LDCs.
27.17 As an economy adds to its physical capital, diminishing returns occur. As a result, increasing the capital stock by
a factor of 2 means that real GDP per worker rises by less
than a factor of 2. As capital per worker increases, economic growth (the growth
rate of real
GDP per person) slows down.
27.18
27.20 As the remaining supply of an exhaustible resource decreases, the supply
curve shifts to the left and and raises its equilibrium
price. Basically, as a resource becomes more scarce, it becomes more valuable.
27.21 Malthus said that a
rising population means more people working on a fixed amount of land, so
diminishing returns implies less food production per person. Eventually, starvation sets in and reduces the
population to the level at which people can just produce enough food per person
to survive. In fact, the world population has grown
enormously since Malthus's time, and food production
per person has increased rather than decreasing as Malthus
predicted. This has occurred mainly
because of increases in technology that have overcome the problem of fixed
resources (such as wood for heat, land for farming, etc.). In addition, Malthus's
argument that population expands until people reach the subsistence level has
been contradicted by subsequent studies, which show that people choose family
sizes based largely on other factors, and family sizes tend to decrease as
incomes increase.