Factors of growth and income distribution

Explain what economic growth is and which measure is typically used to quantify it. For a country, what difference does it make to grow by $2\ \%$ compared to $5\ \%$?

Explain the difference between economic growth and recession. The term "technical recession" is used when GDP falls for two consecutive quarters: what does that mean and how would it be noticeable in the news and around you?

Growing $1\ \%$ a year for $30$ years multiplies income by roughly $1.35$; growing $3\ \%$ a year multiplies it by $2.43$.

1. a) Interpret the difference: what does it mean for the living standard of grandchildren compared with grandparents in each case?
2. b) Explain why small differences in the growth rate matter so much in the long run (the compounding effect).

The GDP of a country increases from $100,000$ million euros to $104,000$ million in one year.

1. a) Calculate its annual growth rate.
2. b) If the population grew by $1\ \%$, did income per capita also grow? Justify your answer.

The countries Arta and Briga have the same GDP, $200,000$ million euros, but Arta has $5$ million inhabitants and Briga has $10$ million.

1. a) Calculate the income per capita of each country.
2. b) Explain why GDP per capita is a better measure than total GDP for comparing living standards.

An international report compares two economies in the year 2024:

• Emerging Country: Per capita income of €10.000, with a sustained GDP per capita growth rate of 6.0% per year.

• Advanced Country: Per capita income of €40.000, with a sustained GDP per capita growth rate of 2.0% per year.

1. a) Using the rule of 72 (estimated doubling time: $72 / \text{rate}$), calculate how many years it will take for the Emerging Country to double its income for the first time and estimate in how many decades it will manage to catch up with the Advanced Country's per capita income (assuming both maintain their average growth rates constant).
2. b) In practice, many developing countries stall their convergence after reaching middle-income levels. Explain two economic reasons that justify why convergence is not automatic (the so-called "middle-income trap") and predict how a deterioration in legal certainty or property rights would affect the timeline calculated in the previous section.

Name the factors that explain an economy's growth and classify these examples: building a motorway, training workers, inventing new management software, and having courts that enforce contracts.

Explain what labour productivity is (output per worker or per hour). One bakery produces $200$ loaves per hour per worker and another, $120$: which is more productive and what three reasons could explain the difference (machinery, training, organisation)?

A country increases its output by $4\ \%$ in a year, but its workers grow by only $1\ \%$ and its capital (machinery, infrastructure) by another $1\ \%$.

1. a) Where can the rest of the growth come from (technology, organisation, training)? What name does that "unexplained" part receive?
2. b) Reason why that source is the most valuable one for growing in a sustained way.

Distinguish between physical capital and human capital, and classify: a factory robot, a welding course, a delivery van and the accumulated experience of a surgeon. Which of the two types of capital does the person "carry with them"?

What are a country's institutions (laws, courts, registries, the stability of the rules) and why do they count as a factor of growth? Imagine two identical countries except that in one of them contracts are not enforced: what happens to investment?

One factory with $50$ workers produces $10,000$ parts a month; another, with $80$ workers, produces $14,000$ parts.

1. a) Calculate productivity per worker for each factory.
2. b) If the first produces more per worker thanks to better machinery, which factors of growth does the comparison illustrate? Relate it to physical capital and technology.

The Ministry of Economy has an extraordinary budget allocation to reboot the economy and is torn between two opposing measures:

• Proposal A: Distribute a direct check of €1 000 to each citizen to boost immediate consumption.

• Proposal B: Finance a ten-year plan to modernize Dual Vocational Training and provide advanced technical qualifications.

1. a) Economically justify why Proposal B has a greater capacity than Proposal A to shift the PPF (Production Possibility Frontier) to the right in the long run. Model the complete causal chain connecting human capital accumulation with potential GDP growth, explaining its effect on labor productivity, unit labor costs, and aggregate demand.
2. b) If Proposal B generates more solid and sustainable growth, predict why governments often have incentives to opt for Proposal A. What political business cycle failure explains this time lag, and what institutional mechanism would you design to shield training investment from electoral cycles?

Two neighboring regions start from an identical economic situation and receive the same amount of Cohesion Funds per capita (€1,500 annually) for a decade, invested entirely in transport infrastructure (highways and high-speed rail). Ten years later, Region Alpha has increased its GDP per capita by 28% and has attracted logistics and industrial companies, while Region Beta has barely grown by 3% and its infrastructure registers minimal usage.

1. a) Interpret this divergence based on the theory of the determinants of economic growth: why does the accumulation of physical capital generate strongly diminishing returns if complementary factors such as human capital or a pre-existing business ecosystem are not present? Develop two technical arguments.
2. b) As the head of regional economic planning, design a plan to redirect the funds for Region Beta. Justify which three areas you would reallocate the budget items to in order to transform spending into a real multiplier of long-term productivity.

The manufacturing industry of a country automates its assembly lines by replacing operational jobs with robots and artificial intelligence systems. Productivity per hour worked grows by 30%, but 25,000 low-skilled workers lose their jobs in the process.

1. a) Analyze the tension between the "displacement effect" (destruction of routine jobs) and the "compensation/productivity effect" (cost reduction, job creation in complementary activities, and an increase in real income). Predict what will happen in the short versus long term with structural unemployment and wage dispersion if the market is left to self-regulate.
2. b) Faced with this shock, the trade union demands a ban on replacing labor, and the employers' association demands full freedom to dismiss. Design a viable economic policy alternative that combines the absorption of technical change with the protection of employability, justifying the specific measures in which investment in human capital should materialize.

A public administration decides to evaluate and fund its public centres based on their productivity:

• In secondary schools, the chosen indicator is the percentage of students who pass the Leaving Certificate exams relative to the total number of students enrolled in 5th Year.

• In public hospitals, the chosen indicator is the total number of patients discharged per bed per month.

1. a) Apply Goodhart's Law ("when a measure becomes a target, it ceases to be a good measure") to predict what incentive distortions and opportunistic behaviours school leaderships and medical teams will develop to maximise their budget figures. What hidden costs will society bear in terms of equity and service quality?
2. b) Design an alternative performance measurement system for one of the two services (the hospital or the secondary school) that measures the true added value generated and is immune to opportunistic manipulation of results.

The figure shows the Lorenz curve of an imaginary country: on the horizontal axis, the cumulative percentage of population (from poorest to richest) and, on the vertical axis, the cumulative percentage of income received.

1. a) Which measure of inequality is provided by the gap between the curve and the diagonal? Explain your answer.
2. b) Interpret the marked point: what does it mean for the poorest $60\ \%$ of the population to receive $25\ \%$ of the income?

The income an economy generates is distributed among the factors: wages for labour, and profits, interest and rents for capital and property. Explain what the "functional distribution of income" is using the example of a cake shop that takes in $\text{€}\ 10,000$ a month: what items come out of that revenue and who do they go to?

In country A, the richest $20\ \%$ receive $45\ \%$ of income and the poorest $20\ \%$ receive $5\ \%$; in country B, those percentages are $35\ \%$ and $10\ \%$.

1. a) Calculate for each country the ratio between what the richest $20\ \%$ receive and what the poorest $20\ \%$ receive.
2. b) Interpret the results: which country is more unequal and how does this relate to the shape of its Lorenz curve?

A government increases taxes on high incomes to fund school meal grants.

1. a) Analyse the measure from the perspective of efficiency and equity.
2. b) Explain the potential conflict between both objectives and reason whether it exists in this case.

Look at the following data for two economies with an identical GDP per capita of €32,000:

• Country A: The richest 10% concentrates 48% of the national income (Gini index = 0.46), the early school leaving rate is 22%, and life expectancy at birth is 76 years.

• Country B: The richest 10% concentrates 21% of the national income (Gini index = 0.26), early school leaving is 5%, and life expectancy at birth is 83 years.

1. a) Relying on the law of diminishing marginal returns of income on individual well-being and access to merit goods, justify why Country B achieves substantially better social indicators while having the same average income per capita as Country A.
2. b) An analyst in Country A argues that "the absolute priority must be to maximize GDP per capita growth up to €36,000 by lowering taxes on high incomes, as their wealth will trickle down to the rest." Critically evaluate this statement: predict its impact on the Gini Coefficient and the HDI, and explain what analytical bias they commit by using only GDP per capita as a thermometer of socioeconomic progress.

Analyze the well-known statement: "We should not worry about inequality: if the country grows, the economic tide rises and lifts all boats equally, so the social gap closes on its own."

1. a) Rigorously refute this statement using the concepts of the Lorenz Curve, Gini Coefficient, and the distinction between absolute poverty and relative poverty. Demonstrate how an economy can experience an annual GDP growth of 3.5% for a decade and, at the same time, move its Lorenz Curve further away from the line of perfect equality.
2. b) Design a package of two complementary public policies (one supply-side and one redistributive) to ensure that a period of digitalization-driven growth reduces the Gini Coefficient without discouraging business investment or distorting labor supply. Justify their transmission mechanisms.

In a parliamentary debate on taxation and growth, two opposing viewpoints are presented:

• Stance A: "Any attempt to reduce inequality punishes success and reduces incentives to work, innovate, and take risks, holding back economic growth."

• Stance B: "Excessive inequality destroys long-term economic growth by blocking the country's productive potential."

1. a) Technically justify Stance B by analyzing two specific macroeconomic transmission channels: 1) credit market imperfections and their impact on human capital formation for lower-income households; and 2) the marginal propensity to consume across different income brackets and the sustainability of aggregate demand.
2. b) Evaluate the equity-efficiency trade-off (Okun's "leaky bucket"). Establish a criterion to differentiate when inequality acts as a positive incentive and when it turns into an extractive drag on potential economic growth.