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Summary Growth, Institutions and Business summay
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Growth, Institutions and Business summay
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Week 1 (H1)Chapter 1:
GDP = gross domestic product value of total goods and services produces (minus intermediates)
in a country in 1 year or total income so total output of income divided by population.
GDP is an import way to measure the standards of living. But it doesn’t measure the economic-well
being. Also quality can’t be measured well. Moreover GDP tells nothing about inequality
Purchasing power parity (PPP): to convert amount from other years and countries and compare
different GDP of countries with each other.
Variation in growth rate got much more in last decades the growth of some countries is much
higher than other countries.
Before 1820 the global growth rate and the growth rate of countries were very slow.
After 1820 the differences in growth between countries became more and more. The income
differences between countries were very small, but from 1820 is became bigger.
Europe started to grow sooner than other countries, but countries like Japan started to grow later
but with a higher growth rate so they caught up.
Week 2 (H2 & 3)
Chapter 2:
Because we compare countries by comparing the GDP of them we look at the output.
More capital more output so you need more investment investment = saving so you
need more saving.
Productivity is also important productivity can be higher if the technology and efficiency increase.
Other factors which are important for differences in GDP and growth between countries are culture
and policies.
Efficiency = how the available technology and its inputs are used in producing outputs
organization of the economy and institutions.
Technology = in terms of research and development, knowledge and scientific advancement.
To be able to explain the differences in income among countries we can distinguish between:
- Accumulation of inputs into production versus productivity.
- Productivity differences because of two components: differences between technology and
efficiency.
- Distinction between proximate and ultimate factors affecting growth.
Proximate cause = event which is immediately responsible for causing some observed result
(growth)
Ultimate cause = something that affects an observed result through a chain of intermediate events.
Factors of production: inputs into production
Production function: relation between factors of production and quantity of output.
See figure 2.2 page 36!
Economists test economic models with the data they have quantitative analysis.
, But economists have never enough information. For example we want to maximize happiness or
utility but this is hard to observe.
Scatter plot: relation between one variable (horizontal) and other variable (vertical) by a single point.
Outliers: observations that are outside the relationship correlation and correlation coefficient.
If there is no relation between X and Y some third variable (Z) causes X and Y omitted variable.
In the case of omitted variable using multiple regression.
Chapter 3:
Capital: physical object that do work for us productive, been produces by investment, limited,
earn a return and it depreciates.
Differences in physical capital per capita accounted for only 25% of differences between income of
countries. So the key to explaining income levels and growth differences did not lay in physical
capital.
Solow model showed that because of diminishing marginal returns sustained growth cannot be
achieved through capital accumulation technological progress is the key for sustained growth.
The solow model focuses only in capital and technological progress.
In the solow model investment in physical capital is endogenous and technological progress is
exogenous. Solow model can give a good prediction of the income(growth) of countries. But this
model is not perfect because it doesn’t take population growth for example into the account. And
this model is not good for the long-run because in the long run the growth will be zero in the steady
state. Moreover solow model doesn’t take every factor into the account for production function and
further there are different production functions.
Diminishing marginal product: how much extra output produced if one more unit of input is used.
Descriptive: evidence based on correlation.
Predictive: evidence based on causation.
Production function: Y = F(K, L)
Constant return to scale: if each input multiply by 2 output also increase times 2.
Output per worker: Y = F(K) per worker there is no labor.
Cob-douglas production function: F(K, L) =
A = productivity not only technological progress but any other error in the measurement of inputs.
α = between 0 and 1 determines how capital and labor are combined to produce output.
Cob-douglas production function per-worker: Y = AK^ α
Depreciation = 𝛿K
Change in capital (ΔK) = investment (i) – depreciation (𝛿)
A part of output is invested investment (i) = ϒy
Hence change in capital:
Steady states: when investment is equal to depreciation no change in capital ΔK = o
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