Chapter 1 Flashcards
If overall GDP growth rate is faster than population growth rate
—> Then GDP per capita growth is positive
—> The overall economy must grow faster than the population in order to boost living standards
International Comparisons, what do we use to compare standard of living across countries?
Purchasing Power Parity (PPP) exchange rate: T
Determinants of Growth
—> Growth is basically determined by the ability of an economy to produce goods and services.
How does an economy produce goods and services?
Labor (raw labor and human capital) and physical capital
Know-how (technology or total factor productivity [TFP])
frontier
richest set of countries
Marginal product of capital (MPK)
extra output generated by an additional unit of capital, holding all else equal.
As K increases, holding all else equal, MPK
decreases
Marginal product of labor (MPN)
Marginal product of labor (MPN)
As N increases, holding all else equal, MPN
decreases
diminishing returns to factors of production
This negative relationship between the marginal product of a factor and the amount of that factor used
Discrete-time
Periodic changes, that is, variables remain stable during a given interval of time (say, for one period). At the end of the period, variables may take on different values for the following period, but then once again remain unchanged for the duration of that period. Graphically, the time path of variables in a discrete-time model looks like step functions.
Continuous-time models
Time flow is assumed to be continuous and thus variables (like GDP, GDP per capita) can take on new values at any moment. Variables in a continuous-time model typically have a time path that appears like a smooth line (often with a trend).
All fast-growing economies made large investments in
New factories and plants
Physical infrastructure
Telecommunications
—> Often provided or supported by the government
These investments increased
Productive capacity Labor productivity Technical progress Economic growth Living standards.
Financed by (fast-growing investments
Domestic savings—by households, corporations, and governments.
External financing
Solow Model output=
capital + labor + technology
𝑨
Technology level is fixed
𝒏
Population growth rate
𝜹 / 𝒅
Depreciation rate
𝒔
Saving or Investment rate
Steady state or the Balanced Growth Path
When no tech progress with constant capital-labor ratio, output per worker, and consumption per worker.
Us a star * or the subscript ss to indicate steady state level
The economy is at its steady state when output per worker, consumption per worker and capital per worker are all stable and not changing.
If k begins at some level other than k, it will move toward k
For k below k, saving > the amount of investment needed to keep k constant, so k rises.
For k above k, saving < the amount of investment needed to keep k constant, so k falls.
In the basic Solow model, the fundamental determinants of long-run living standards
- The saving (or investment) rate
- Population growth rate
- Level of Technology or TFP
golden rule level of capital labor ratio
hich maximizes steady
state consumption per worker, is reached when the following condition is satisfied:
