What is the best measure of standard of living?
Real GDP per capita.
Why is nominal GDP per capita misleading?
It doesn’t adjust for inflation.
Why does GDP converted using exchange rates understate poor countries’ living standards?
Because non-traded goods are cheaper in poor countries (PPP is better).
What does an increase in CPI indicate?
Inflation, not higher living standards.
Does increasing the labour force increase productivity?
No — it increases total output, not output per worker.
What is the Solow capital accumulation equation (intensive form)?
Δk = sf(k) − δk
sf(k)= investment per worker
δk= depreciation per worker
When is steady state reached?
When investment = depreciation (sf(k) = δk).
If k < k*, what happens?
Investment > depreciation → capital rises.
k is capital
k* is steady state capital per worker
If k > k*, what happens?
Depreciation > investment → capital falls.
What happens if the saving rate increases?
Higher steady-state capital and output (but not higher long-run growth).
Does a higher saving rate increase long-run growth?
No — it increases the level of output, not the growth rate.
What increases productivity (output per worker)?
Technological progress, human capital, physical capital.
What shifts the production function upward?
Technological progress.
Does a higher saving rate always increase steady-state consumption?
No.
What is the Golden Rule level of capital?
The level that maximizes steady-state consumption.
Golden Rule condition (no population growth)?
MPK = δ
If saving is above the Golden Rule, what happens?
Capital is too high → consumption is lower than optimal.
Capital accumulation shows diminishing returns. What does this mean?
Each additional unit of capital increases output by less.
What happens if depreciation increases?
Lower steady-state capital and output.
What happens immediately after an increase in saving?
Investment jumps, capital begins rising.
If a question says “per worker”, which form should you use?
Intensive form.
Standard of living improves when what increases?
Real GDP per capita.
What does real GDP per capita measure?
Standard of living (how many goods and services people can consume).
Why do exchange-rate conversions exaggerate income differences?
They ignore lower prices of non-traded goods in poorer countries.
