Growth Part 2 Flashcards
Show how the amount of capital determines the amount of savings.
- Amount of capital determines amount of output produced
- Amount of output determines the amount of savings and in turn the amount of capital accumulated over time
How can increase in output per worker come about?
- Capital accumulation - increases in capital per worker (K / N)
- Technological progress - improvements in the state of technology which shift the production function F
Determine the role capital accumulation plays in the growth process.
Diminishing Returns - Successive equal increases in capital per worker lead to smaller and smaller increases in output per worker
Determine the effect of an improvement in the state of technology
An improvement in technology pivots the production function outwards, leading to an increase in output per worker for a given level of capital per worker
Can capital accumulation itself sustain growth?
No - due to decreasing returns to scale
How can sustained growth be attained?
Sustained technological progress
When focussing on the role of capital accumulations, give assumptions we must make.
- Population, participation rate and unemployment rate are all constant
- No technological progress
What three assumptions are made to derive the relation between output and investment?
- Y = C + I + G - dealing with closed economy
- T - G = 0 - assume public saving level is zero
- S = sY - private saving is proportional to income
Show that I = sY, given Y = C + I + G, given T - G = o and S = sY
Y = C + I + G
=> Y - T = C + I + G - T
=> Y - T - C = I + G - T
=> S = I + G + T
=> I = S - (T - G)
=> I = S
=> I = sY
Output per worker function
Y / N = f (Kt / N)
Investment per worker function
I / N = s.f (K / N)
What is investment?
It - the flow of new plant and machinery built during period t
What is capital?
Kt - the stock of existing plant and machinery available for use in period t
Explain depreciation.
Capital depreciates at rate δ per year, so (1-δ)Kt remains at the start of period t+1
