Ch 3 - Factor accumulation

Question 1

Name 2 ways economic growth could happen through

Answer 1

Factor accumulation, enhancement of the production function (tech progress)

Question 2

What is the Solow model?

Answer 2

A model of capital accumulation which helps us to understand the conditions for continuous growth of economies through the accumulation process

Question 3

What are the assumptions in the basic Solow model?

Answer 3

Perfect capital and labor markets, expansion of inputs leads to an expansion of output, the whole population is in the labour force, production function stays constant over time (no tech progress), constant returns to scale, diminishing marginal returns to capital and labour

Question 4

Why are the production and saving function curves concave?

Answer 4

To reflect the diminishing returns assumption

Question 5

In the absence of tech progress, the long run growth rate of output per worker is ___

Answer 5

Zero

Question 6

What are 2 possibilities to explain income gaps?

Answer 6

Countries are away from their steady states and are in transition to their steady state, countries are at their steady states and income gaps are due to steady state (parameter) differences

Question 7

Name 2 ways the zero long run growth rate could be changed in

Answer 7

Replace diminishing marginal returns assumption with a constant returns assumption, consider a variant of the Solow model where the prod function exogenously expands over time (tech used to produce output from capital and labour improves)

Question 8

In the presence of tech progress, the long run growth rate of output per worker is ___

Answer 8

Equal to the rate of tech progress

Question 9

What is unconditional convergence?

Answer 9

Countries converge to the same steady state regardless of their initial level of development

Question 10

What is conditional convergence?

Answer 10

Countries converge to their own steady states depending on savings, depreciation, population growth and tech progress rates. There’s no convergence in output levels (unless same parameters) but there’s convergence in growth rates

Question 11

What is growth accounting?

Answer 11

Instead of estimating parameters, it assumes some reasonable values for parameters and tries to see how much of the growth could be explained by measured expansions in factors of production

Question 12

What is development accounting?

Answer 12

Similar to growth accounting in terms of techniques but focuses on a cross section of countries, whereas growth accounting considers a single country over time

Question 13

What is a drawback of the Solow model?

Answer 13

It assumes differences in key parameters without explaining why these differences exist