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Principles of Macroeconomics - Chapter 12


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At what rate has the U.S. average income grown over the past century.
About 2% . This leads to a doubling of income about every 35 years.
What is a good guage of economic prosperity?
The level of real GDP
What is a good guage of economic progress?
The growth of real GDP
What determines a nation's standard of living?
The productivity of its workers.
What does the term "productivity" refer to?
The quantity of goods and services that a worker can produce for each hour of work.
What are the determinates of productivity?
1. Physical Capital
2. Human Capital
3. Natural Resources
4. Technological Knowledge
What is physical capital?
Physical capital is the equipment and structures used to produce goods and services.
What is human capital?
Human capital is the knowledge and skills acquired by workers through training, education, and experience.
What are natural resources.
Natural resources are the inputs of production provided by nature such as land, rivers, and mineral deposits.
What is technological knowledge?
Technological Knowledge is society's understanding of the best way to produce goods and services.
What can government do to raise productivity and living standards.
1. Encourage savings and investment.
2. Encourage foreign investment.
3. Promote a high level of education by providing good schools and encouraging people to take advantage of them.
4. Protect property rights and maintain political stability.
5. Promote free trade with other countries.
5. Fund and encourage reasearch and development.
What is the short term cost to society of a high level of investment.
A high level of investment reduces the funds that are available to spend on goods and services in the short term.
What is the "catch up" effect.
As the stock of capital rises, the additional output resulting from an additional unit of capital falls. This allows poorer countries to grow at a faster rate than more developed countries.
What is the disadvantage of foreign investment?
Foreign investment will cause some income to leave the country. This means that foriegn investment causes less of a rise in income than in production.
What two international organizations are aimed ad promoting economic prosperity around the world?
The World Bank and the International Monetary Fund.
Why does free trade help promote economic prosperity?
Free trade allows a country to focus on producing goods & services that it is well suited for and trade for others.

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