Notes for Chapter 20

1.  What has happened to living standards in recent history?  What is the best economic measure of standards of living?

2.  What is GDP per capita?  Why do we care about GDP per capita and not (so much) about GDP per worker?

3.  Suppose a government enacts a policy that causes the long-run growth rate of average labor productivity to increase by 0.2 percentage points.  Why would such a small improvement matter?

4.  What is the largest source of increased GDP per capita?  (Answer: increased labor productivity, but higher labor participation helps).

5.  Why is average labor productivity so important?  What are the determinants of average labor productivity?  Make sure you understand the role of each one.

1. Define human capital.  If you were the Minister of Education of a small, poor country, what would you do to improve the human capital of the average citizen of your country?

                                                              i.      Suppose the Minister of the Treasury says, “that’s a waste of time.  Farm workers don’t really need to know algebra.”  What would you answer?

2. Define physical capital (your definition, maybe drawn from chapter 18, p. 450, should make clear why more physical capital leads to economic growth). 

                                                              i.      In a free-market economy, who accumulates physical capital?  (Answer: private businesses).  What kinds of policies can a government enact that will encourage private firms to accumulate capital?

                                                           ii.      Remember that there’s no free lunch: more factories mean giving up current consumption of pizzas.  So you’ve got to be sure that the extra investment is worthwhile.

3. What are diminishing returns to capital?  Explain Table 20.2, the similar table in the slides, Question 4, and Problem 6.  Think up two other examples of a situation where adding more of just one factor of production leads to more output, but at a decreasing rate.

4. What is the role of land and natural resources?

                                                              i.      Can a country grow with very little of them?

                                                           ii.      Even though individual countries can import natural resources, the whole world can’t.  So the environment needs to be protected, even on economic grounds.

5. Explain this sentence: “economists would agree that new technologies are the single most important source of productivity improvement, and hence economic growth in general.

                                                              i.      When we say “productivity” we really mean the same as “average labor productivity.”

                                                           ii.      What kinds of policies encourage technological development, research, etc.?

                                                         iii.      What is the role of population in technological development?

6. What is the role of entrepreneurship and management in economic growth?  Why is social capital important?  All of these are essential to a free-market economy (and not necessary for a communistic one).
7. What is the role of government?  (Besides broader policies, how does the specific function of government contribute to economic growth?  In this, the caveat is also clear: a government that does too little, or too much, or badly, will hurt economic growth.)

6.   “Limits to Growth” view.  Limited natural resources and the role of market incentives.  If there's a great scarcity of oil, how will the market respond?  How will technology adapt?

7.  Growth and the environment.

8. Economic growth can hurt what Pope John Paul II described as the “human ecology.”

1. Explain this argument (you may want to look at Centesimus Annus, pars. 36 through 40).  Here’s a link http://www.vatican.va/edocs/ENG0214/_INDEX.HTM 
2. In many cases, capitalism puts great stress on social bonds and social ties (if you live in a medium-sized city, chances are you don’t know your neighbors).  What happens to social capital then?  If making a buck is the prime goal, what happens to trust and reliability?  What can you predict will happen to economic growth in such a society?
3. On the other hand, societies have realized this and have reacted.  The internet creates a virtual community of great strength; companies have realized they need to “humanize” the work environment for people to work well; successful firms are precisely those that are trustworthy are reliable.
4. One might even say that a strong culture is resilient and will learn to use capitalism for its own, loftier ends: it will deal with the social stresses and will engender faster economic growth.
5. What happens, then, in a society where the culture is weak for one reason or another?  One thinks of post-communist countries, of countries ravaged by war and civil strife, of countries divided by race, caste, religion, economic status, etc.  Can countries with weak cultures, adapt capitalism successfully without self-destructing?

                                                              i.      Par 42 of Centesimus Annus is illuminating here.

6. We’ll explore these topics in Economics and Ethics of Development (Spring, elective) and in Catholic social teaching (Fall, required).