Exercises: 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 $5\ \%$?

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

Explain what labor 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, organization)?

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?

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?

The GDP of a country increases from $100,000$ million dollars 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 dollars, 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.

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.

A country's GDP rises from $100,000$ million to $102,000$ million and, the following year, to $104,040$ million.

1. a) Calculate the growth rate for each year.
2. b) Explain why growing $2\ \%$ two years in a row is not exactly growing $4\ \%$: what is the effect that explains this called?

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 standard of living 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).