5. The Long Run

Question 1

What determines output in SR and MR?

Answer 1

Fluctuations

Question 2

In the LR what determines output?

Answer 2

Capital accumulation and technological change

Question 3

In the very LR what determines output?

Answer 3

Technological change

Question 4

What does economic growth refer to?

Answer 4

Change in GDP per capita

Question 5

What is effective labour?

Answer 5

Technology x labour

Question 6

What do capital per worker and output per worker do in the steady state?

Answer 6

They grow at the rate of technological progress ga

Question 7

What does an increase in the saving rate do?

Answer 7

Shifts sf(kan) upwards so the level of output per effective worker increases in the LR but the growth of output per effective worker is unchanged in LR

Question 8

Problems with solow model

Answer 8

1. DRS to capital means once economy reaches steady state it stops growing in per capita terms
2. Doesn’t explain determinants of technological progress
3. Doesn’t explain lack of convergence for poorest countries
4. Suggests differences in per capita income are due to differences in K. In practice, H and A are also important