Chapter 10 Flashcards
(13 cards)
How do we compare standard of living in different countries?
Measuring the GDP using a common set of prices for all countries. Adjusted GDP can be thought of as purchasing power across time or across countries.
Purchasing power parity numbers
What is the Mathusian trap?
Malthusian trap: the proportional increase in output and population was due to that any increase in output would lead to a decrease in mortality, leading to an increase in population until output per person was back to its initial level.
What is a aggregate production function?
Aggregate production function: the specification of the relation between aggregate output and the inputs in production.
Y = F(K,N)
What is the state of technology?
It’s what determines how much output can be produced from given quantities of capital and labor.
What determines growth?
Capital accumulation and technological progress
Why can’t capital accumulation by itself sustain growth?
Because of decreasing returns to capital, sustaining a steady increase in output per worker will require larger and larger increases in the level of capital per worker. At some stage, the economy will be unwilling or unable to save and invest enough to further increase capital. At that stage, output per worker will stop growing.
What does a saving rate imply?
A higher savings rate can’t permanently increase the growth rate of output. But a higher saving rate can sustain a higher level of output.
What determines technological progress?
- The set of blueprints available to the economy
- How the economy is organised
Define different returns to scale.
F (xK , xN ) = xY : constant returns to scale
F (xK , xN ) < xY : decreasing returns to scale
F (xK , xN ) > xY : increasing returns to scale
We usually assume constant returns to scale in macroeconomics. This means that the average costs of production are independent of how large a firm is.
When does the production function shift?
When there is a change in the amount of capital per worker, we move along the production function.
When there is a change in the production function, keeping constant K/N, the production function shifts:
When the state of technology increases, output increases, for a given value of capital per worker. The production function shifts upwards.
How does output determine capital?
Remember the IS curve: Output determines savings = investment, which determine how much capital gets accumulated.
In a closed economy, the equilibrium in the goods market requires that investment equals total saving.
f ( K/N ) determines how much output (per capita) is produced, andthe saving rate s determines the allocation of this output between consumption (per capita) and investment (per capita).
What happens outside of the steady state?
If capital per worker is below its steady state value Kt < K∗, investment exceeds depreciation. Capital gets accumulated until it reaches K∗.
If capital per worker is above the steady state value Kt > K∗, depreciation exceeds investment. The capital stock diminishes until it reaches K∗.
The system will thus always revert to its equilibrium.
What happens to steady state output?
If capital per worker is below its steady state value, output per worker is also, and so both will increase.
If capital per worker is above the steady state value, output per worker is also, and so both will decrease.
So no matter what capital stock and output we start from, we will always end up at K∗ and Y∗. At the steady state, the growth rate of capital and output is zero.
