Chapter 5 Flashcards
(13 cards)
how much does gross investment, capital stock and depreciation make up of GDP?
gross i = 20
CS = 2 x GDP
depreciation = 7
therefore 15% GDP
what is the effective no. workers? what is production per effective worker a function of?
EN is a function of capital per effective worker
Y/EN = F (K/EN, 1) = f(k)
k = K/EN
what is the steady state? what does it mean?
situation where economy grows but capital per effective worker and production per effective worker are both constant
K = kEN and Y = f(k) EN
what do we see by using the rule of thumb for growth rates?
we see capital stock and GDP grow at a rate = to the population growth + rate tech improves
change in K/K = change in Y/Y = n + g
what is capital stock per effective worker on the steady state growth path?
f’(k*)/ (1 + markup) - depreciation = r bar above
what is real IR =?
r bar = p + g
where g is the growth of production per worker
what does a higher willingness to save and invest lead to?
leads to higher LR levels of K and production in the country
what do we need for GDP to grow in LR?
need population growth and/or tech development
what does the golden rule say?
to maximise steady state consumption the CS should be increase until MPK = sum of population and technological growth rates + depreciation rate
f’(k) = n + g + depreciation
why does increasing capital stock beyond the steady state level not increase consumption?
the investment necessary to maintain additional units of capital PEW will exceed the additional production obtained from higher capital stock
what factors explains income differentials in countries and by how much?
differences in physical and human capital - 50%
other factors = political and social structures eg. ‘institutions’ tax system, law and order, corruption
what happens when it becomes progressively harder to improve technology?
more and more workers must be put into research and development if technology to improve at constant rate
what has happened to the cost of growth in most advanced economies?
increased as a larger proportion of the resources that have been put into R+D