Terms in this set (46)
What is different in the real world that isn't in the solow model?
- technological progress surged instead of being constant
- real GDP per person grew by 1.9% instead of being constant
What is E?
E= labor efficiency
What is the assumption in the Solow model about technological progress?
Technological progress is labor-augmenting:
increases labor efficiency at the exogenous rate of g
what is the equation of increasing labor efficiency?
Production function of the Solow model with technological progress
Y= F(K,L x E)
where (L x E) is the number of effective workers
What effect does labor efficiency on output?
increases in labor efficiency have the same effect on output as increases in the labor force
What is the equation for output per effective worker? Steady-state growth rate?
y=Y/LE= output per effective worker; 0
What is the equation for capital per effective worker? Steady-state growth rate?
k=K/LE= capital per effective worker; 0
What is the production function per effective worker?
What is the saving and investment per effective worker?
What is the break-even investment?
(δ+n+g)k= amount of investment necessary to keep k constant
What is δk?
δk→ to replace depreciating capital
What is nk?
nk→ to provide capital for new workers
What is gk?
gk→ to provide capital for the new "effective" workers created by technological progress
What is equation for output per worker? Steady-state growth rate?
(Y/L) = y x E; g
What is the equation for total output? Steady-state growth rate?
Y= y x E x L; n+g
What is the Golden Rule in terms of capital stock
c* = y* - i*
When is c* maximized?
MPK = δ +n+g ↔ MPK-δ = n+g
What is balanced growth in the steady state?
Balanced growth is where many variables grow at the same rate
- Solow model predicts Y/L and K/L at the same rate g→ K/Y is constant
What is convergence in the Solow model?
Solow model predicts the other things equal poor countries should grow faster than rich ones
Why doesn't convergence happen in the real world?
- countries with similar savings & population growth have income gaps shrink 2% per year
- larger samples income converge about 2%
What is conditional convergence? what is the relevance
solow model predicts conditional convergence
- countries converge to their own steady states, which are determined by savings, population growth, and education
what are the possible explanations for the correlation between capital per worker and production efficiency?
- production efficiency encourages capital accumulation
- capital accumulation has externalities that raise efficiency
- a third, unknown variable causes capital accumulation and efficiency to be higher in some countries
Policy issues: if
U.S. economy is below the golden rule steady state and should increase s
Policy issues: if
U.S. economy is above the golden rule steady state and should reduce s
what are the 3 facts about the U.S. economy to estimate (MPK-δ)
the capital stock is about 2.5 times one year's GDP
About 10% of GDP is used to replace depreciating capital
3. MPK x k=0.3y capital income is about 30% of GDP
How to determine δ
δk/k= (.1y)/(2.5y) →
How to determine MPK
(MPK x k)/k= (.3y)/(2.5y) →
Is the U.S. above or below the Golden Rule steady state?
The U.S. is below the Golden Rule steady state; increasing the U.S. saving rate would increase consumption per capita in the long run
Policy Issues: How to increase the savings rate?
- reduce the government budget deficit (or increase the budget surplus)
- Increase incentives for private saving:
1. reduce capital gains tax/ corporate income tax/ estate tax because they discourage saving
2. Replace federal income tax with a consumption tax
3. Expand tax incentives for IRAs
Policy Issues: How to allocate the economy's investment
Solow has one type; real world has many types, but 3 categories
What are the 3 categories in the real world capital?
1. private capital stock
2. Public infrastructure
3. Human Capital: the knowledge and skills that workers acquire through education
How should investment be allocated in capital
1. Equalize tax treatment of all types of capital in all industries
2. Industrial policy: Govt should actively encourage investment in capital of certain types or in industries because they may have positive externalities that private investors don't consider
what are the problems with industrial policy?
- the govt may not have the ability to "pick winners"; choosing industries with the highest return to capital
- politics rather than economics may influence which industries get preferential treatment
Why establish legal institutions?
to protect property rights
Why establish capital markets?
to help financial capital flow to the best investment projects
Why have a corruption-free government?
to promote competition enforce contracts, etc.
what are 4 policy issues the encourage technological progress
- patent laws
-tax incentives for R&D
- grants to fund research at universities
- industrial policy
What is the endogenous growth theory with the Solow model
- sustained growth in living standards is due to technological progress
- the rate of technological progress is exogenous
What is the endogenous growth theory?
a set of models in which the growth rate of productivity and living standards is endogenous
Production function of Y=Ak
A= the amount of output for each unit of capital; exogenous and constant
How is the [Y=Ak] model different than solow
MPK diminishes in Solow, but is constant in the [Y=Ak] model
[Y=Ak] model; investment?
[Y=Ak] model; Depreciation?
[Y=Ak] model; equation of motion for total capital
∆K=sY - δK
Does capital have diminishing returns?
depends on the definition of capital;
yes if its just plant and equipment
No if considering knowledge is a type of capital