Long Run Economic Growth

Question 1

Explain the trend of UK productivity

Answer 1

• Been stagnant ever since the GFC
• Potential is 121 Vs Actual being 101
• Reasons include austerity, disincentive to work, confidence
• UK’s productivity puzzle is bad; a vicious cycle

Question 2

What does the Solow Model aim to do?

Answer 2

• Explains why some countries are richer than others
• Evaluates causes of growth quantitatively
• Decomposition of GDP into FoP
• Shows that capital accumulation =/= growth
• Contrasts what previous thinkers thought

Question 3

What is the relationship between capital and growth?

Answer 3

• Capital =/= growth
• If you know how to use capital, it can cause growth

Question 4

What are some features of the macroeconomic model?

Answer 4

• Consumers: Represents households who supply labour and consume
• Firms: Represents businesses who use good factors of production to make goofs
• Equilibrium is the model outcome

Question 5

What is the Firms production function?

Answer 5

• Excludes labour markets and financing
• Y = AKⁿ
• Y = Output
• A = Productivity
• K = Capital Stock
• ⁿ = The assumed amount of capital (around 0.3)

Question 6

Give the equation for motion of Capital (CONTEMP VERSION)

Answer 6

• K’ = I + (1-δ)k
• K’ = Next Years Capital
• I = Investment
• δ = Depreciation rate
• k = This Years Capital
• For an increase in K’, you need I>(1-δ)

Question 7

What is the Consumers Income function?

Answer 7

• Excludes unemployment and assumes perfect income
• Consumes a constraint fraction of GDP & own all the capital in an economy
• I = sY
• Consumers either save or spend, so:
• Y = C + I

Question 8

How do you derive the main equation for Next Year’s capital?

Answer 8

• I = sY = sAKⁿ
• K’ = I + (1-δ)k
• K’ = sAKⁿ + (1-δ)k

Question 9

What is the steady state point?

Answer 9

• The curve K’ = sAKⁿ + (1-δ)k meets the K’=K curve at a point
• This point means that K = constant
• This means that capital does not equal sustained economic growth (DMR)

Question 10

Why does the curve display Diminishing Marginal Returns?

Answer 10

• The further a nation starts away from the steady-state level of capital (catch-up effect)
• They will grow quickly at first and then tail off
• South Korea and China in the 1990s-2000s

Question 11

What is the Savings Ratio? What does the increase in s mean for the overall economy

Answer 11

• The savings ratio is the propensity of consumers to save their income
• If s increases, c falls, so AD falls and GDP falls too
• However, in the long run, I would increase, so GDP and AD would rise
• This causes the curve to shift upwards to a new steady state

Question 12

What is the only way to provide long-term GDP growth?

Answer 12

• Savings rate increases the steady state level, but k will become constant again eventually
• Thus, only productivity gains can increase growth
• In the SR and LR, Productivity will increase GDP growth

Question 13

Is there a correlation between savings rate and wealth?

Answer 13

• Weak positive correlation
• This means that countries are not rich because of savings
• Countries are rich due to capital stock stemming from productivity gains

Question 14

How does productivity improve national GDP and capital stock?

Answer 14

• Human Capital and technology increases
• Better Institutions and facilities
• Greater Efficiency

Question 15

What are some sources of growth?

Answer 15

• Savings (K/Y)
• Labour (L/N)
• Productivity (A)
• Human Capital (h)

Question 16

What does Acemoglu say about Why Nations Fail?

Answer 16

• Historical Views saw Geographic, Cultural and Leadership factors as the reason for earnings between countries
• However, this can be counter-proved by the Americas, as the US and Latin America have drastically different ideas
• Acemoglu argues that Inclusive institutions that facilitate growth, investment and innovation level the playing field and increases the wealth of the nations
• Poorer countries have extractive institutions which aim to keep people the elite few with power

Question 17

What does MRU say about Ideas within the Solow Model?

Answer 17

• The Solow Model suggests that there will be a point when growth will stop
• But, productivity improves the output with the same input
• Increase in output per worker increases capital accumulation
• This increases output (Y), creating more investment and further capital accumulation