W10P3 - Notebooklm Flashcards
What is the effect of a change in the saving rate on long-term economic growth in the Solow model?
A change in the saving rate will shift the steady-state capital stock and output level. However, it does not lead to sustained economic growth once the new steady state is reached. Economic growth only occurs during the transition to a new steady state.
What is the relationship between the saving/investment rate and income/growth observed in empirical data?
There seems to be a rather weak positive correlation between the average investment/saving rate and income levels across countries. The relationship between the investment rate and economic growth appears to be even weaker or non-existent. This might be because not all countries are in a steady state.
How does introducing population growth (n) into the Solow model affect economic growth?
Introducing population growth allows the model to show that absolute output can grow in the steady state at the rate of population growth (n). However, per capita income does not grow in the steady state with only population growth. An increase in the population growth rate leads to a lower steady-state capital stock per capita and income per capita.
How does introducing technological progress (A) into the Solow model affect economic growth?
Introducing labour-augmented technological progress (A) explains sustained growth in per capita income. In the steady state with technological progress, absolute output and capital grow at the rate (n + a), while output per labour and capital per labour grow at the rate of technological progress (a).
What is “effective labour”?
Effective labour is the term used when technological progress is labour-augmented and is represented as A * L, where A is the productivity term and L is the amount of labour. Both an increase in A or L will increase output.
What is a key limitation of the Solow growth model in explaining long-run economic growth?
The key limitation is that the growth rate of technological progress (a) is assumed to be exogenous. The model does not explain what drives these improvements in productivity.
What is the focus of “new growth theories” or “new growth models”?
These models attempt to endogenize technological progress by explaining the factors that cause the productivity term (A) to increase. By understanding what causes A to increase, these models aim to provide a more complete explanation of sustained economic growth.
In the Solow model with population growth (n), what happens to steady-state capital per capita (KSS) and income per capita (YSS) if the population growth rate increases?
If the population growth rate (n) increases, the steady-state capital stock per capita (KSS) and income per capita (YSS) will fall. This is because a faster-growing population requires more investment just to keep the per capita capital stock constant.
In the Solow model with population growth (n), what happens to total capital stock and total income if the population growth rate increases?
If the population growth rate (n) increases, the total capital stock and total income in the economy will grow at a faster rate.
What is the relationship between population growth rate and per capita real GDP observed in empirical data?
Empirical data suggests a relatively strong negative correlation between the population growth rate and per capita real GDP. Countries with lower population growth rates tend to have higher per capita income levels.
In the Solow model with labour-augmented technological progress (A), what is the growth rate of absolute output and capital in the steady state?
In the steady state with labour-augmented technological progress, absolute output and capital grow at the rate (n + a), where ‘n’ is the population growth rate and ‘a’ is the growth rate of productivity.
In the Solow model with labour-augmented technological progress (A), what is the growth rate of output per labour and capital per labour (per capita income and capital) in the steady state?
In the steady state with labour-augmented technological progress, output per labour and capital per labour grow at the rate of technological progress (a). This indicates rising living standards over time.
In the Solow model with labour-augmented technological progress (A), what happens to the steady state of capital and output when measured in efficiency units (divided by A*L) if there is an increase in technological progress (a)?
An increase in technological progress (a) can lead to a lower steady state of capital and output when measured in efficiency units (per A*L). This doesn’t mean technological progress is bad; rather, it reflects that the economy can achieve the same output level with less capital relative to the effective labour force.
What is the crucial difference in the Solow model’s predictions for economic growth with and without technological progress?
Without technological progress, the Solow model predicts that per capita income will eventually stop growing in the steady state. With labour-augmented technological progress, the model can explain sustained growth in per capita income at the rate of technological progress (a).
Why is the growth rate of productivity (a) considered a problem in the basic Solow growth model?
The growth rate of productivity (a) is considered a problem because it is exogenously given in the Solow model. The model does not explain the sources or determinants of technological progress; it is simply assumed to occur at a certain rate.
