economic growth part 2 Flashcards
(19 cards)
population growth in solow model
n rate at which labour grows
βπΏ
πΏ = π
by adding this, model can exhibit growth in GDP in the steady state
as grow, more employment
labour grows at rate n
allowing steady state condition to be
π π π = π + πΏ π
modified golden rule
π΄π·π² = π + πΉ
consumption maximised when the marginal product of capital is equal to its marginal cost
benefit of adding population growth to solow model
incorporates that population and employment grow
exhibits growth in GDP in steady state
predicts that higher population growth is associated with countries being poorer
Technological progress
increased knowledge better working techniques and more advanced equipment make workers more productive
allows one worker to produce more by efficiently using greater value of capital
solow production function with technological progress
π = π (π¨, π², π³)
A- technology
if A increases even with K and L unchanged Y rises
A referred to as total factor productivity
capture technological progress
assume A grows at rate a
βπ΄ =a
π΄
production function with technological progress
Y= F(K, AL)
AL- effective labour, as technology allows a given number of workers to produce more
what is y and k redefined as
π¦ = π/π΄πΏ π = πΎ/π΄πΏ
output per effective worker and capital per effective worker
steady state condition because of technological progress
ππ (π) = (π + π + πΉ) π
golden rule condition with technological progress
π΄π·π² = π + π + πΉ
max consumption achieved by making consumption per effective worker as large as possible
steady state where marginal product of capital per effective worker exactly compensates for the new investment
summary of solow pt1
saving determines the capital stock in the long run
higher saving -> higher capital stock-> higher output
steady state consumption max at the golden rule
population growth affects long run growth
higher population growth -> lower capital per worker -> lower output per worker
summary of solow pt 2
efficiency of labour affects long run growth
growth in output per worker is determined by exogenous technological progress
growth accounting and the solow residual
how much does capital accumulation, population growth and technological progress drive growth
solow residual can capture this
found by using what we can measure, capital, labour and GDP and attributing what is left to technological progress
πππππ€ πππ πππ’ππ = βπ/π β ππ’π‘ππ’π‘ ππππ€π‘β ππ’π π‘π ππππ€π‘β ππ πππππ‘ππ πππ βππ’ππ π€πππππ
βπ΄/π΄ = βπ/π β (πΌ βπΎ/πΎ + (1 β πΌ) βπΏ/πΏ)
why are some countries rich and others poor
as solow predicts in steady state growth in output per worker depends only on the rate of technological progress a
if tech is available to all the models predicts economies will have different growth rates only due to some transiting to the steady state
in model only a can explain the differences in output per worker
implication of this is that different steady states exist
when controls are made for differing characteristics countries do appear to be converging to their individual steady states
explanation
insufficient capital accumulation e.g due to war (does not explain why foreign capital does not flow to take advantage of high returns to investment)
lack of access to latest tech
if issues fixed country can catch up
conditional convergence
assumed all countries have access to same tech
not the case, implying two countries with differing production functions will converge to different steady-states
definition- convergence occurs to steady state that depend on the individual attributes of an economy, nation or region is called conditional convergence
different production functions could help explain observed differences between countries
Why do production functions differ (hard factors)
several factors that affect the productivity of labour and capital
-public infrastructure (K^G) e.g streets contribute to general productivity and available to all users, inadequate in some countries
Human capital- education and training- allows workers to be more productive and enhance other factors (role of govt)
Human capital- health- ill workers are not available for productive activity if health services low, poor life expectancy, lower incentives to invest in education, incentive to emigrate
why do production functions differ- sofit factors
even when accounting for hard factors the differences in total factor productivity between rich and poor are immense
attribute gaps to soft factors
property rights- undemocratic regimes and wars, property rights are precondition for investment in physical and human capital, if cannot be sure they will own investment tmrw why invest
human rights- human capital damaged if imprisoned, barred or donβt have basic freedom
policies to promote growth
golden rules- solow model suggests policymakers should increase/decrease saving rate to move economy towards its optimal level
policies to do this
subsidise education, research and development
increase protection of innovators (intellectual property/patents) encourages innovation
encourage international trade- (spread knowledge and tech, nations can specialise in goods which it has a comparative advantage)
promote stable economic environment that promotes a good business climate
role for government/ institutionsβ are resources allocated efficiently, are capital markets efficient (frictionless and costless as possible) enforcement of contracts, competition policy.
endogenous growth theories
attempt to determine technological progress within the model, a grows at different rates what contributes to that growth rate.
