Long-run Macroeconomics Flashcards
Is there growth of per capita variables in Solow steady state?
Yes, they grow at rate g which is the growth of TFP
Which variables decide speed of convergence?
- Savings rate of human and physical capital
- Population growth
- Depriciation rate
Does the Solow model predict absolute convergence?
No, only conditional convergence
What is conditional convergence?
When economies have similar parametres (the variables of convergence) - poorer countries grow faster
How does the neoclassical growth model - Basic Solow - compare to empirics?
The model works qualitatively, but the magnitude of predicitons are wrong:
- Estimated capital share to high, 2/3 vs 1/3
- Estimated rate of convergence to high, half the speed
- Observed interest rate differentials and international capital flows much lower than predicted
How does the introduction of human capital in the Solow model improve the fit to empirics of convergence?
- Accumulating capital takes time. Introducing human capital makes an increase in savings or output accumulate both physical and human capital. More capital is accumulated –> the rate of convergence goes down.
How does the introduction of human capital in the Solow model improve the fit to empirics of differencials in interest rates?
It is important to note that differentials in interest rates still are high.
Between a poor and rich country level of education is thought to be larger than differences in technology. This would mean that marginal product of human capital is larger than marginal product of physical capital. In the basic Solow model these two forms of capital are aggregated, having a higher interest rate of capital.
How does the introduction of human capital in the Solow model improve the fit to empirics of capital share?
The capital share is increased in the model, without affecting the physical amount of capital.
Ideas in R&D models are thought to be non-rivalrous and non-excludable. Explain why the non-excludability can be negative regarding economic growth, and how governments have fixed the issue.
Non-excludability of ideas can be an issue because in perfect competition the market price of public goods are 0. Thus, private firms would have no incentives to invest in developing ideas.
The introduction of patents have solved the problem, by providing an entitiy developing an idea with the right to exclude people from using it.
What does the rate of new ideas depend on?
- Level of existing ideas
- Number of scientist in R&D department
What are the assumptions of the Solow model?
- Closed economy
- Perfect competition
Brief recap AK-model:
Y = AK
Constant returns to K
Externalities - human capital, learning by doing
Predictions:
- No convergence
- Policy has long-run effect on growth rate
Why do we not see large international flows of capital as the Solow model predict?
Bad institutions or risk might be a barrier to invest in developing countries. Risk of extrapropation
