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ECON2030 TEST 3 - CHAPTER 10 Growth happens because we have...

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CHAPTER 10 Growth happens because we have more resources or we have found ways to do more with our current resources (more physical capital and technological change) We want to see the marginal product of labor and marginal product of capital increase MP^L- marginal product of labor MP^L- is the additional output the last laborer hired produced MP^K- marginal product of capital MP^K- is the additional output the last unit of capital employed produced Economic growth model- explains growth rate in real GDP over time Per worker production function is the relationship between real GDP per hour worked and capital per hour (along the line technology is fixed) (line shifts if there is technological change) The per worker production function increases at a decreasing rate this means that using more capital, on average, increases the real GDP per laborer. Increases by less than the last unit of capital did capital intensive economy- we are using lots of machines per unit of labor labor intensive economy- using lots of labor per unit of capital increasing capital today increases output per laborer if we have technological change the per worker production function shifts an improvement in technology causes the per worker production function to go up patent- an exclusive right to produce a specific good for some specified period of time in general people will not take on research and development unless there exists some reasonable probability that they can profit from the new technology PERCENTAGE CHANGE(GROWTH RATE)- year 2- year 1/ year 1 X 100 AVERAGE ANNUAL GROWTH RATE- add up growth rates / # of years Main sources of technological change: - Better machinery and equipment - Increases in human capital - Better means of organizing and managing production In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change New growth theory- technological change is influenced by economic incentives and is determined by the working of the market system (knowledge capital is key to economic growth
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