Economic Growth I Flashcards
Solow Model
looks at the determinants of economic growth
and the standard of living in the long run
TFP =
Output/Input
Define y = Y / L
output per worker
Define k = K/L
capital per worker
If A increases - TFP what happens
the MPL, MPK, APK, APL and Y will all increase
How does TFP affect income inequality?
Marginal product of unskilled labour
MPU = (1 - µ) Y/LU
Marginal Product of Educated labour
MPE = µ Y/LE
µ will be much higher as you get more
production if you increase skilled workers rather than if you increase unskilled worker
Skill premium equals
= Income Inequality = WageE – Wageu
So, when Y increases due to increase in TFP
– the productivity of skilled labour increase will be much higher than the productivity increase of unskilled labour
- This is because skilled labour know how to apply new technology better than unskilled labour so they will be able to make better use of it in order to be more productive
Explain if when government provides more education
it will mean that number of skilled labour will increase – and number of unskilled labour will fall
Ø This will reduce the real wage for skilled workers due to increase supply
and wage rate for unskilled labour falls due to reduced supply
Ø This will reduce the level of income inequality
Ø If technology moves faster than education?
income inequality will
increase – and if education moves faster income inequality will decrease
if economy wants to have sustainable technology growth they need to do what?
they need to sustain
the level of education
I = ∆K
Investment means purchase of good and services that are durable and input for
production
GDPs grows in the long run because of?
investment – investment is the purchase of capital for input – this will increase the capital stock
Increase in capital stock will mean that GDP = Y will increase. What will it also mean?
This means that savings will also increase as S = Y – C – G so as Y increases so will
savings
Since savings have increased in the short term it will
there will be a surplus of loanable funds as the interest rate hasn’t adjusted – in the long run interest rate will fall until the loanable funds market is in equilibrium. This will lead to an increase in investment leading to increase in GDP again as shown
above
GDP cannot grow forever and ever
GDP will only grow if investment is
more than the depreciation
