Chapter 4: Macroeconomic growth

Question 1

Conclusions of the growth history

Answer 1

• the steady improvement of standards of living for the average individual cannot be taken for granted
• there is convergence in standards of living in some cases, but not always
• In Western Europe, the very high economic growth
  between 1945 and 1973 (“les trente glorieuses”) is atypical
  from a historical perspective

Question 2

determinants of economic growth

Answer 2

• ntroduction
• GDP Production Function
• Sources of GDP/cap. Differences
• Growth Decomposition

Question 3

Two elements can make an economy larger and richer

Answer 3

1) Greater quantity of available factors of production —
physical capital, labour (raw materials, energy)

2) Better factor productivity

Question 4

Four determinants of the size (i.e., activity level) of an

economy

Answer 4

1 Labour productivity
2 Employment rate
3 Population pyramid
4 Population size

Question 5

GDP Production Function

Answer 5

The GDP production function is a conceptual tool expressing the relationship between:

• final aggregate production (GDP)
• factors of production sharing the proceeds of value-added
  creation (namely, capital and labour)

Question 6

☞ The per-capita income in an economy is therefore

determined by

Answer 6

1 the per-capita productive capital stock kt
2 the employed share of total population 𝜆t
3 the total factor productivity At

Question 7

☞ GDP/cap. differences can be

Answer 7

• between countries at the same instant ➙ synchronic

- within a given country over time ➙ diachronic

Question 8

Productive Capital Accumulation ➙ k

Some Determinants

Answer 8

1 Institutional/Political
➥ Political stability
➥ Legal framework and protection of property rights
➥ Attitude towards free trade

2 Economic/Financial
➥ Presence of sufficient (either domestic or foreign) financial
capital for making investment possible
➥ Development of the financial system for allocating funds to
those who need them for productive purposes
➥ Cost of capital (price of investment goods & financing costs)

3 Human
➥ Availability of adequate workforce
➥ Entrepreuneurship

4 Negative
➥ Destructive: wars or natural disasters
➥ Inhibiting: corruption, political instability or predative tax
system

Question 9

, the employed share of total population is

determined by

Answer 9

1 Population pyramid

2 Employment rate

Question 10

Total Factor Productivity ➙ A

Some Determinants

Answer 10

1 Technology

2 Human capital

3 Some other determinants of A

Question 11

GDP growth can therefore be the consequence of

Answer 11

1 an increase of At, that is, an improvement of total factor
productivity

2 an accumulation of productive capital

3 a growth of employment due to

• an increase of the share of the population that is employed
• population growth

Question 12

The evolution of per-capita income therefore depends on the growth of

Answer 12

1 the total factor productivity (technological progress. . . )
2 the per-capita productive capital stock
3 the share of the population that is employed

Question 13

Impact of Population Growth

Conclusions

Answer 13

1 Population growth increases per-capita income only if the
productive capital growth is more than proportional

2 If productive capital accumulation is insufficient (i.e., k
decreases), then population growth will impoverish the
average person

3 Extreme case: no capital growth

Question 14

☞ The evolution of the productive capital stock results from two opposing forces

Answer 14

1 Investment in new productive equipments It
2 Depreciation of existing capital stock 𝛿 Kt as a result of usage (the depreciation rate 𝛿 ∈ (0, 1) is assumed constant)

Question 15

At ka the investment curve s f (k) is above the depreciation

line 𝛿 k and the capital stock increases between t and t + 1

Answer 15

➥ Growth of capital stock (total and per capita)

➥ Growth of GDP (total and per capita)

Question 16

At kb the investment curve s f (k) is below the depreciation

line 𝛿 k and the capital stock decreases between t and t + 1

Answer 16

➥ Contraction of capital stock (total and per capita)

➥ Contraction of GDP (total and per capita)

Question 17

At k∗ the investment s f (k) exactly equals the depreciation

𝛿 k and the capital stock is constant between t and t + 1

Answer 17

➥ Capital stock (total and per capita) remains constant
➥ GDP (total and per capita) remains constant
➥ The economy has reached a steady state

Question 18

Lessons Learned

Investment

Answer 18

Lesson #1
Investment is indispensable to growth

Lesson #2
Investment is not sufficient on its own to generate perpetual
growth

Lesson #3
The steady-state per-capita income increases when
1 total factor productivity improves
➥ The production and investment curves swell upwards
2 the saving rate increases
➥ The investment curve swells upwards
3 the equipment depreciation rate falls
➥ The depreciation line becomes more horizontal

Lesson #4
The saving rate of an economy influences
the income (per capita) in the steady state
the speed of transitory growth towards the steady state

Question 19

Lessons Learned

Investment

Answer 19

Lesson #1
Investment is indispensable to growth

Lesson #2
Investment is not sufficient on its own to generate perpetual
growth

Lesson #3
The steady-state per-capita income increases when
1 total factor productivity improves
➥ The production and investment curves swell upwards
2 the saving rate increases
➥ The investment curve swells upwards
3 the equipment depreciation rate falls
➥ The depreciation line becomes more horizontal

Lesson #4
The saving rate of an economy influences
the income (per capita) in the steady state
the speed of transitory growth towards the steady state

Lesson #5
There is convergence between economies with similar structural
parameters (technology, saving rate, depreciation rate)

Lesson #6
There is no absolute (unconditional) convergence between
economies

Lesson #7
The steady-state level of GDP/cap. depends negatively on the
population growth rate

Lesson #8
With population growth, there is perpetual growth of K and Y

Question 20

catch-up effect

Answer 20

An economy that is initially poor would grow faster than a

richer but structurally-comparable economy

Question 21

If any of the 3 following situations occurs, then this country
might remain stuck in a “poverty trap”

Answer 21

1 Increasing returns to scale at low-income levels
2 Saving rate depends on the income level (in particular,
saving is hardly possible at low-income levels)
3 High population growth at low-income levels

Question 22

Three Causes of Extreme Poverty

Implications

Answer 22

☞ In situations 1 and 2, the country can benefit from (foreign)
capital inflow
➥ To local governments?
➥ As foreign direct investment (FDI)?
➥ Good-governance issues?

☞ In situation 3,
➥ foreign capital inflow can be a solution
➥ but birth rate reduction could also work

Question 23

Solow-Swan With Government

Assumptions

Answer 23

1 Public expenditure = only public consumption = G

2 In every period, public expenditure is financed by an
equivalent tax T on households

3 In every period, public expenditure is a fixed fraction
𝛾 ∈ [0, 1) of GDP