Growth Theory

Question 1

Output fluctuations dominate in the…

Answer 1

… SR and MR

Question 2

Output growth dominates in the….

Answer 2

… LR

Question 3

Growth is the…

Answer 3

… steady increase in aggregate output over time

Question 4

Adjusted real GDP numbers measure

Answer 4

purchasing power across countries also called purchasing power parity (PPP) numbers

Question 5

Growth in rich countries since 1950 shows…

Answer 5

1) Large increase in output per person

2) convergence of output per person across countries

Question 6

Facts of growth (since 1950’s)

Answer 6

1) large increase in output per person, however, sustained growth is only a recent phenomenon
2) Convergence of output across a homogenous set of countries

Question 7

Convergence means….

Answer 7

… countries with lower levels of output per person typically grow faster as diminishing returns aren’t as present in developing countries

Question 8

The aggregate production function depends on…

Answer 8

… the state of technology; higher state of technology, higher Y is for given levels of L and N

Question 9

Source of growth: Capital Accumulation

Answer 9

Increases in output per worker (Y/N) can come from increases in capital per worker (K/N)

Question 10

Source of growth: effects of an increase in technological progress

Answer 10

Improvements in state of tech shift the production fn and lead to more output per worker given capital per worker

Question 11

Capital accumulation cannot…

Answer 11

…. sustain growth

Question 12

Sustained growth requires….

Answer 12

…. sustained technological progress

Question 13

Axis for Solow model

Answer 13

y-axis: Output per worker (Y/N)

x-axis: Capital per worker (K/N)

Question 14

Solow’s (neo-classical model), two determinations for output and capital hold:

Answer 14

1) The amount of capital determines the amount of output being produced
2) The amount of output determines the amount of saving and, in turn, the amount of capital accumulated over time

Question 15

Two steady state (Long-run equilibrium) relations:

Answer 15

1) Capital determines output Yt/N = f(Kt/N)
2) Output determines capital accumulation
Kt+1/N - Kt/N = s(Yt/N) - ∂(Kt/N)

Combining the two relations, we can study the behaviour of output and capital over time

Question 16

When capital and output are low…

Answer 16

… investment exceeds depreciation and capital increases

Question 17

When capital and output are high….

Answer 17

…. investment is less than depreciation and capital decreases

Question 18

The steady state is when…

Answer 18

… output per worker and capital per worker are no longer changing in the economy, hence growth rates are zero

Question 19

If there is no pop growth…

Answer 19

… the steady state growth of both output and capital is zero

Question 20

Three observations about the effects of savings rate on the growth of output per worker are:

Answer 20

1) the saving rate has no effect on the LR growth rate of output per worker, which is equal to zero
2) Nonetheless, the saving rate determines the level of output per worker in the LR. Other things equal, countries with higher saving rate will achieve higher output per worker in the LR
3) Increase in the saving rate will lead to higher growth of output per worker for some time (i.e. SR), but not forever.

Question 21

Golden rule level of capital

Answer 21

Level of capital associated with the value of the saving rate that yields the highest level of consumption in the steady state

Question 22

Steady state output per worker is equal to…

Answer 22

… the ratio of the saving rate to the depreciation rate.

Question 23

Technological progress is a result of…

Answer 23

… firms research and development (R&D) activities

Question 24

Spending on R&D depends on:

Answer 24

1) The fertility of new of the research process, or how spending on R&D translates into new ideas and new products
2) The appropriability of research results, or the extent to which firms benefit from the result of their own R&D

Question 25

Determinants of fertility:

Answer 25

1) Interaction between basic research and applied research
2) The country: some better at basic, others at applied
3) Time

Question 26

Fast growth may come from two sources:

Answer 26

1) Higher rate of technological progress
2) Adjustment of capital per effective worker, K/AN, to a higher level. In this case, the growth rate of output exceeds the rate of tech progress.

Question 27

Tech progress in advanced economies

Answer 27

By definition will be at the technological frontier, with the need to develop new ideas, new processes and new products

Question 28

Tech progress in less advanced economies

Answer 28

Easier to imitate rather than innovate new tech, taking the form of technological catch up