The Modern Approach to Economic Growth

Question 1

What did Moses Abramowitz say in 1952 and why did this change after the war

Answer 1

He conducted a survey that showed that economic growth theory hadn’t developed much since the classical period
This changed dramatically after the war because of Keynes, developments in the western world and economists using more maths

Question 2

What the formula for total output (Q)

Answer 2

Total output (Q) = Consumption (C) + Capital Goods (I)

Question 3

What is the formula for National Income (Y)

Answer 3

National Income (Y) = Consumption goods (C) + Savings (S)

Question 4

What becomes equal at equilibrium

Answer 4

At equilibrium Y=Q and S=I

Question 5

What is the production function

Answer 5

Y= F(K,N)
K is the capital stock/machines
N is the supply of labour

Question 6

Multiplying the production function by what will create scalable constant returns

Answer 6

Constant returns scale if zY=F(zK,zN) where z is any positive number

Question 7

What happens if z=1/N

Answer 7

Output per worker increases as capital per worker increases

Question 8

What is the marginal product of capital - specifically what does it mean if its diminishing

Answer 8

Marginal product of capital is the amount of capital employed for a given labour force.
As this increases, eventually the marginal product of the capital will decline

Question 9

What is the formula for savings

Answer 9

S=sY where s is the average and marginal propensity to save and 0<s<1

Question 10

What happens if the Savings formula is divided through by N

Answer 10

S/N=sf(K)
Gives the savings expression in per capita terms and replaces Y with f(K)

Question 11

What does K/N stand for

Answer 11

Capital stock

Question 12

What is the formula for Investment (I)

Answer 12

Investment (I) = change in K (new investment) + delta K (depreciation)

Question 13

What is the required investment to keep K/N constant

Answer 13

If capital depreciates at a rate of delta per period then investment per head must be delta X K to stop K/N from falling
Similarly, if labour grows at a rate of n per period then an additional investment of n X K will be needed to keep K/N constant
This means that (delta+n)k is the required investment to keep K/N constant

Question 14

Whats the long run equilibrium condition for investment

Answer 14

change in k = i - (delta+n)k = 0

Question 15

In equilibrium S=I so s=i
What does this mean for a constant K/N

Answer 15

sf(k) = (delta+n)k
Meaning that output capital and labour will grow at a constant rate of n

Question 16

How can technological progress affect economic growth

Answer 16

Technological progress is an improvement in knowledge that enables a higher output to be produced from the same inputs

Question 17

What does technological improvements do to the production function

Answer 17

Shifts the entire production function allowing aggregate output to grow over time

Question 18

How does a rise in savings rate affect the production function

Answer 18

Gross investment will now exceed required investment and the capital stock will increase
While k is moving upwards average labour productivity will be increasing so the growth of Y will exceed the growth of N

Question 19

What happens when equilibrium is reached again after a change in savings and what does this mean

Answer 19

Once equilibrium is reached Y/N will be constant again meaning that savings alone cannot permanently raise the growth rate because of the diminishing marginal product of capital