Solow model-Trend Growth+Human Capital

Question 1

What do we incorporate in the solow model to allow for trend growth?

Answer 1

Technology

Question 2

What is the need for technology in the solow model?

Answer 2

Without technology, capital and output p.w growth in the steady state are zero.
- Data shows sustained economic growth

Question 3

What assumptions do we make about technological change?

Answer 3

It is exogenous I.e determined outwith the model
- grows at constant rate g

Question 4

What is the balanced growth path?

Answer 4

Where everything (k,y and A ) are all growing at same constant rate g

Question 5

What parameters effect level of output per worker?

Answer 5

Savings (s) and Population growth (n)
- Only induce temporary surge/decline
- human capital (h)

Question 6

What is growth of y determined by?

Answer 6

Growth rate of technology A =g

Question 7

What does modifying the solow model to include human capital allow?

Answer 7

Allows the skills of workers to increase separately from technological progress

Question 8

Where is labour included within the human capital production function?

Answer 8

Contained within H

Question 9

What do we assume about the growth rate of human capital (h)

Answer 9

That growth rate of h=0

Question 10

What does human capital (as determined by u) influence?

Answer 10

Influences level of output p.w
- helps to further explain why some countries are so poor and others so rich
- increased h means increased y meaning country is wealthier

Question 11

What truly is variable A?

Answer 11

It is the solow residual- it captures everything about a country that makes it more/less productive

Question 12

What component of the model explains most of the variation in y across countries?

Answer 12

Technology
- explains around 1/2-2/3 of variation

Question 13

What is the downfall of absolute convergence?

Answer 13

Only works to a reasonable level on countries with similar parameters
-In reality parameters across countries can differ significantly

Question 14

What is conditional convergence?

Answer 14

Conditional convergence says that countries grow faster, they farther they are from their OWN STEADY STATE

Question 15

What is convergence?

Answer 15

Convergence says that poor countries grow more quickly than rich countries
- can see how this could be true from growth of k equation

Question 16

Which explanation of growth rates seems more plausible and why?

Answer 16

Conditional convergence
- because using data on based on a countries deviation from their steady state we can see that the further away a country is from their steady state the higher their growth rate

Question 17

What is the problem with convergence?

Answer 17

Some poor countries might grow slowly as they are already close to their steady state, whereas convergence says because they are poor they will grow faster

Question 18

What happens to equality if there is absolute convergence (like in OECD)?

Answer 18

Appears countries become more equal

Question 19

What happens to equality if there is conditional convergence?

Answer 19

It is possible countries may be getting more unequal

Question 20

What does the data suggest on equality?

Answer 20

In absolute numbers (rather than looking at countries as units) of people it appears the world is getting more equal

Question 21

What does the solow model including human capital say is the reason for why some countries are so rich and others so poor?

Answer 21

Countries are rich because they have: - high investment rates
- spend large fraction of time accumulating capital (large h)
- low population growth rates
- high level of technology