The Modern Approach to Economic Growth Flashcards
What did Moses Abramowitz say in 1952 and why did this change after the war
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
What the formula for total output (Q)
Total output (Q) = Consumption (C) + Capital Goods (I)
What is the formula for National Income (Y)
National Income (Y) = Consumption goods (C) + Savings (S)
What becomes equal at equilibrium
At equilibrium Y=Q and S=I
What is the production function
Y= F(K,N)
K is the capital stock/machines
N is the supply of labour
Multiplying the production function by what will create scalable constant returns
Constant returns scale if zY=F(zK,zN) where z is any positive number
What happens if z=1/N
Output per worker increases as capital per worker increases
What is the marginal product of capital - specifically what does it mean if its diminishing
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
What is the formula for savings
S=sY where s is the average and marginal propensity to save and 0<s<1
What happens if the Savings formula is divided through by N
S/N=sf(K)
Gives the savings expression in per capita terms and replaces Y with f(K)
What does K/N stand for
Capital stock
What is the formula for Investment (I)
Investment (I) = change in K (new investment) + delta K (depreciation)
What is the required investment to keep K/N constant
If capital depreciates at a rate of delta per period then investment per head must be deltaK to stop K/N from falling
Similarly, if labour grows at a rate of n per period then an additional investment of nK will be needed to keep K/N constant
This means that (delta+n)k is the required investment to keep K/N constant
Whats the long run equilibrium condition for investment
change in k = i - (delta+n)k = 0
In equilibrium S=I so s=i
What does this mean for a constant K/N
sf(k) = (delta+n)k
Meaning that output capital and labour will grow at a constant rate of n
How can technological progress affect economic growth
Technological progress is an improvement in knowledge that enables a higher output to be produced from the same inputs
What does technological improvements do to the production function
Shifts the entire production function allowing aggregate output to grow over time
How does a rise in savings rate affect the production function
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
What happens when equilibrium is reached again after a change in savings and what does this mean
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
