The Fundamentals Of Economic Growth Flashcards
What is marginal productivity?
The amount of new output per unit of incremental capital.
What are the 5 stylised facts?
- Both output/capita and capital intensity keep increasing.
- The capital-output ratio exhibits little or no trend over time.
- e.g. Output/hour in the USA has increased by 600% but the ratio of capital to output fell.
- Hourly wages keep rising
- The rate of profit is trend less
- The relative income shares of GDP paid to labour and capital are trendless.
What is the steady state?
The capital-labour ratio stops changing when investment=depreciation
This is called the steady state which is a behaviour that is never met.
What is the difference between gross and net investment?
Gross investment is the amount invested in new capital, whereas net investment is the increase in capital stock. The difference between the two is the depreciation of capital stock.
What is net investment and how do we interpret it?
Net investment is the vertical distance between the saving schedule and the depreciation line
NI>0, capital stock per capita is rising and the economy is growing.
NI
What is catching up and when does it occur?
Catching up occurs when a country starts below its steady state GDP and embarks on a faster growth path.
What is the golden rule?
Steady state consumption is the vertical distance between the production function and the depreciation line. It is at its maximum when marginal productivity of capital is equal to the slope of depreciation.
What are dynamically efficient and inefficient countries?
Dynamically efficient - if K/L is less than the golden state k, too little capital has been accumulated, and mpk is higher than depreciation.
Dynamically inefficient - if K/L exceeds the golden state k, too much capital has been accumulated, and mpk is lower than depreciation.
What does the production function show?
A relationship between output and the productive inputs. Two most common ones are capital and labour.
What happens to the golden state when we introduce technological progress and population growth?
The depreciation line is transformed into the capital widening and is represented by (d+n+a)k because capital stock must now keep up with enhanced workers.
In the steady state how does tech progress and pop growth effect growth rates?
- Output and capital per effective labour are constant
- Output-labour and Capital-Labour grow at rate=a
- Out and Capital grow at rate=a+n
What is solow residual?
Change in GDP - Output growth due to growth in capital and hours worked.
