Page 447 - Krugmans Economics for AP Text Book_Neat

Section 7 Summary

3. The key to long - run economic growth is rising labor countries that have high investment in physical capital
productivity, or just productivity, which is output finance it by high domestic savings. Technological
per worker. Increases in productivity arise from in- progress is largely a result of research and develop-
creases in physical capital per worker and human ment, or R&D.
capital per worker as well as advances in technology. 6. Government actions that contribute to growth include
The aggregate production function shows how the building of infrastructure, particularly for trans-
real GDP per worker depends on these three factors. portation and public health; the creation and regula-
Other things equal, there are diminishing returns tion of a well -functioning banking system that channels
to physical capital: holding human capital per savings into investment spending; and the financing of
worker and technology fixed, each successive addition both education and R&D. Government actions that
to physical capital per worker yields a smaller increase slow growth are corruption, political instability, exces-
in productivity than the one before. Similarly, there sive government intervention, and the neglect or viola-
are diminishing returns to human capital among tion of property rights.
other inputs. With growth accounting, which in-
7. In regard to making economic growth sustainable,
volves estimates of each factor’s contribution to eco-
economists generally believe that environmental degra-
nomic growth, economists have shown that rising
dation poses a greater problem than natural resource
total factor productivity, the amount of output pro-
scarcity does. Addressing environmental degradation re-
duced from a given amount of factor inputs, is key to
quires effective governmental intervention, but the
long -run growth. Rising total factor productivity is
problem of natural resource scarcity is often well han-
usually interpreted as the effect of technological
dled by the incentives created by market prices.
progress. In most countries, natural resources are a
less significant source of productivity growth today 8. The emission of greenhouse gases is clearly linked
than in earlier times. to growth, and limiting emissions will require some
reduction in growth. However, the best available
4. The world economy contains examples of success and
estimates suggest that a large reduction in emissions
failure in the effort to achieve long -run economic
would require only a modest reduction in the
growth. East Asian economies have done many things
growth rate.
right and achieved very high growth rates. In Latin
America, where some important conditions are lacking, 9. There is broad consensus that government action to ad-
growth has generally been disappointing. In Africa, dress climate change and greenhouse gases should be in
real GDP per capita declined for several decades, al- the form of market -based incentives, like a carbon tax or
though there are recent signs of progress. The growth a cap and trade system. It will also require rich and poor
rates of economically advanced countries have con- countries to come to some agreement on how the cost
verged, but the growth rates of countries across the of emissions reductions will be shared.
world have not. This has led economists to believe that 10. Long-run economic growth can be analyzed using
the convergence hypothesis fits the data only when the production possibilities curve and the aggregate
factors that affect growth, such as education, infrastruc- demand-aggregate supply model. In these models, long-
ture, and favorable policies and institutions, are held run economic growth is represented by an outward shift
equal across countries. of the production possibilities curve and a rightward
5. The large differences in countries’ growth rates are shift of the long-run aggregate supply curve.
largely due to differences in their rates of accumula- 11. Physical capital depreciates with use. Therefore, over
tion of physical and human capital as well as differ- time, the production possibilities curve will shift inward
ences in technological progress. A prime factor is and the long-run aggregate supply curve will shift to the
differences in savings and investment rates, since most left if the stock of capital is not replaced.

Key Terms

Rule of 70, p. 371 Aggregate production function, p. 376 Research and development (R&D), p. 388
Labor productivity (productivity), p. 372 Diminishing returns to physical capital, p. 376 Infrastructure, p. 389
Physical capital, p. 373 Growth accounting, p. 378 Sustainable, p. 391
Human capital, p. 373 Total factor productivity, p. 379 Depreciation, p. 400
Technology, p. 373 Convergence hypothesis, p. 383

Summary 405