Economics #14 - Economic Growth and the Investment Decision

Question 1

capital deepening

Answer 1

LOS 14.d

• Cobb-Douglas production function: diminishing marginal productivity of labor and capital, but constant returns to scale

Y = TK^<em>a</em> L^{(1-<em>a</em>)}

• a and (1-a) = shares of output allocated to capital (K) and labor (L); a < 1
• T = total factor productivity
• IMPORTANT: in steady state: marginal product of capital (MPK) = rental price of captial (r): aY/K = r

Question 2

productivity curve

Answer 2

LOS 14.d (see graph on eqn page)

• productivity curve: graph of labor productivity vs capital per worker for a given level of technology
• two sources of economic growth (growth in labor productivity):

1. growth in capital per worker - capital deepening (movement along the productivity curve
2. technological change (growth in total factor productivity)

Question 3

growth accounting relations

Answer 3

LOS 14.e

Cobb Douglas: Y = TK^<em>a</em> L^{(1-<em>a</em>)}

growth accounting equation (see eqn sheet):

growth rate in potential GDP = R_labor + R_productivity

R_productivity includes capital deepening and changes in total factor productivity

Question 4

growth theories

Answer 4

LOS 14.i

1. Classical Growth Theory
2. Neockassical Growth Theory
3. Endogenous Growth Theory

Question 5

Classical Growth Theory

Answer 5

LOS 14.i

Classical Growth Theory

• main point: no permanent improvementin standard of living from new technologies
• technology advances lead to:

1. short-term economic growth
2. temporary improvement of std of living

• reversing mechanism is population growth
  economic growth leads to population groeth

Question 6

Neoclassical Growth Theory

Answer 6

LOS 14.i

Neoclassical Growth Theory

• main point: economic growth results from lucky discoveries of new technolgies
• major differences wrt classical growth theory:
  economic growth is independent of population growth
• technological advances lead to:

1. short-term economic growth
2. permanently higher std of living

• in steady state, growth rate in productivity depends only on technological growth and (1-a)

Question 7

major tenents of Neoclassical growth

Answer 7

LOS