economic growth pt1

Question 1

growth

Answer 1

measure of how much richer or poorer we are becoming

Question 2

kaldors 5 facts about economic growth

Answer 2

both output per capita (Y/L) and capital intensity (K/L) keep increasing

The capital-output ratio (K/Y) exhibits little trend over time

Hourly wages keep rising (higher MPL over time)

The rate of profit is trendless

The share of income going to labour and capital are trendless

Question 3

Solow Growth Model

Answer 3

simple production function Y=F(K,L)

assumes constant returns to scale (CRS)- e.g double capital and labour = double output

zY= F(zK,zL)

has no government

output per worker,y, is either consumption or investment

y=c+i

Question 4

Marginal product of capital (MPK)

Answer 4

extra production achievable from one extra unit of capital

assume diminishing marginal product of capital

Question 5

function of capital per worker

Answer 5

zY= F(zK,zL)

z= 1/L

Y/L= F(K/L,1)

y=f(k)

Question 6

output per worker

Answer 6

y=Y/L

Question 7

capital per worker

Answer 7

k=K/L

Question 8

what does y=f(k) imply

Answer 8

size of the labour force has no effect on the relationship between output per worker y and capital per worker k

Question 9

saving in solow model

Answer 9

individuals save some proportion of their income s and consume the remaining fraction (1-s)

c= (1-s)y

y= (1-s)y+i

i = sy

investment per worker = savings per worker

Question 10

what determines output of economy

Answer 10

capital stock per worker, k, and the production function y=f(k)

CS determines economy’s output, which changes over time and lead to economic growth or contraction.

where capital stock is affected by investment and depreciation.

investment adds

depreciation subtracts

Question 11

what determines consumption in the economy

Answer 11

consumption determined by savings rate,s, which determines what proportion of output per worker, y, is consumed by each worker c

Question 12

investment equation in solow growth

Answer 12

i=sf(k)

Question 13

change in the capital stock

Answer 13

change in the capital stock = investment - depreciation

∆𝑘 = 𝑠𝑓 𝑘 − 𝛿𝑘

as k increases, investment per worker increases but depreciation of capital per worker also increases

Question 14

steady state of level of capital per worker k*

Answer 14

where investment = depreciation

∆𝑘 = 0

when

𝑠𝑓 𝑘∗ = 𝛿𝑘∗

Question 15

what does the model predict

Answer 15

economy move towards steady state and will stay there

steady state represents long run equilibrium of the economy

once reach steady state output and capital stock are constant (not what we observe)

economies with low capital stock should grow quickly and slow near steady state

Question 16

saving rate solow growth prediction

Answer 16

solow predicts an economy with a higher saving rate will have a higher steady state level of output per worker

suggesting in long run more saving leads to higher output per worker

Question 17

Golden rule

Answer 17

care about how much we consume

policymaker should choose the saving rate that leads to the steady state at which consumption per worker is highest

e.g golden rule level of capital per worker

𝑐∗ = 𝑓 𝑘∗ − 𝛿𝑘∗

Question 18

steady state calculation

Answer 18

𝑀𝑃𝐾 = 𝑓′ 𝑘∗ = 𝛿

Question 19

dynamic inefficient

Answer 19

if saving rate is above golden rule saving rate

save too much and invest too much leading to too little consumption

Question 20

dynamically efficient

Answer 20

saving rate below the golden rule

saving more raises consumption in the future but at a cost of lower consumption today

Question 21

clarification

Answer 21

does move towards some steady state

not towards golden rule that maximises consumption

have to choose saving rate