Topic 2: Long Run Economic Growth

Question 1

Production Function

Answer 1

Y=AF(K,L)

Question 2

changeY/Y

Answer 2

growth rate of real GDP

Question 3

changeA/A

Answer 3

growth rate in technology aka solow residual - total factor productivity, meant to capture state of technology in the economy, an increase in A can produce more with K and L

Question 4

changeK/K

Answer 4

growth rate of capital stock, K - # of machines & equipment

Question 5

changeL/L

Answer 5

growth rate of labor force - all assumed identical

Question 6

a in growth accounting equationmodel represents

Answer 6

elasticities of output with respect to inputs, estimated based on historical data

Question 7

growth accounting equation

Answer 7

changeY/Y = changeA/A + achangeK/K + achangeL/L

Question 8

assumptions for solow model

Answer 8

pop and work force grow at same rate (n), economy closed (NX=0) and no government (G=0) — therefore, Y= C + I…. in per worker terms, divide by L –y=c+i, due to diminishing MPK in the Solow model the economy will reach a steady state over time (y, c, and k are constant over time) if there is no technical progress

Question 9

Cobb-Douglas Production Function

Answer 9

Y=AKL

Question 10

capital accumulation

Answer 10

Δk_t+1 = i-(n+d)k_t – Δk = net investment, i=gross investment, (n+d)k_t = replacement investment – savings = investment so sy (savings per worker) can replace i

Question 11

MPK

Answer 11

marginal product of capital

Question 12

steady state

Answer 12

y = k – i = (n+d)k n-pop growth rate, d-dep rate – c = k - (n+d)k or k-i

Question 13

solow model: an increase in the savings rate, s, causes

Answer 13

long run output, consumption and capital per worker to RISE because higher savings allows for more investment in a larger capital stock

Question 14

solow model: an increase in the rate of population growth, n, causes

Answer 14

long run output, consumption and capital per worker to FALL because with higher population growth more output must be used to equip new workers with capital, leaving less output available for consumption or to increase capital per worker

Question 15

an increase in productivity causes

Answer 15

long run output, consumption and capital per worker to RISE because higher productivity directly increases output; by raising incomes, it also raises savings and capital stock

Question 16

endogenous growth production function

Answer 16

aggregate function: Y=AK; per worker function: y=Ak

Question 17

endogenous growth assumptions

Answer 17

non diminishing MPK, human capital increases with physical capital, r&d programs, increases in captial and output generate increased technical knowledge which offsets decline in MPK from having more capital

Question 18

endogenous growth capital accumulation

Answer 18

Δk_t+1 = sAk -(n+d)k

Question 19

endogenous growth per worker consumption

Answer 19

c = y-i; Ak_t - Δk_t+1 - (n+d)k_t

Question 20

implications of endogenous growth

Answer 20

savings rate affects long run growth because output proportional to capital (not true in solow)