Long Run growth Flashcards
What 3 factors provoke growth of the natural level of output?
Technology growth, growth in the capital stock, other factors
Define long run growth.
The rise in output per capita (living conditions) overtime.
What does per effective labour mean?
It refers to the variable in question divided by the productivity and labour employed.
What is the production function in the LR and what does it mean?
y=f(k) Output per effective labour = f(capital stock per effective labour)
How can changes in the capital per effective labour be shown?
From movements along the production function diagram
Why is the production function concave?
due to the decreasing marginal returns of capital effective labour
Why does capital stock per effective labour change?
Capital depreciates overtime (machines wear out), growth in technology and population dilutes the amount of capital that each effective labour can work with, new investment in capital goods.
What is the investment formula for the long run,why?
sf(k) as s = savings rate and savings = investment in equilibrium.
What is the required investment formula, what is it?
= deprecitation of capital + growth in technology and population. It is the minimium amount required to maintain the level of capital stock.
When will capital stock increase?
If investment per effective labour is greater than the required investment.
What is the steady state economy?
Where output per effective labour and capital per effective labour is constant and capital per worker and output per worker is growing at the rate of technology growth and output and capital are rising at the rate of population and technology growth.
What if the capital stock of effective labour is greater than the steady state of the economy?
The capital stock of effecitve labour/investment will fall until it reaches the steady state.
What causes a change in the steady state of the economy?
Changes in saving/investment - shifts the investment (sf(k) ) curve upwards.
What determines the level of output in the long run?
Savings/investment - not permanent though
Why might increasing savings not lead to better long run growth path?
Increased savings = lower consumption so more saving today causes consumption to fall today but raises future consumption.