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Chapter 6 Long-Run Economic Growth

# Chapter 6 Long-Run Economic Growth

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Long-Run Economic Growth
Abel Macroeconomics
Long-Run Economic Growth
Abel Macroeconomics

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07/16/2011

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Long-Run Economic Growth
Growth AccountingRemember that we studied hat a country’s real GDP depends upon three things:

Amount of labor available

Amount of capital available

Total factor productivityGrowth accounting says that long term GDP growth depends upon three things –

Rate of growth of the labor supply

Rate of growth of the capital stock

Rate of growth of total factor productivityGrowth Accounting Equation- is the production function written in growth rate form.
Δ
Y/Y Is the change in real GDP divided by the total amount of real GDP. This is Yequal to the percentage change in real GDP—the growth rate of real GDP.
A/A is the change in total factor productivity divided by the level of total factor. This isequal to the percentage change in total factor productivity—the rate of productivitygrowth.
N/N is the change in the labor supply divided by the total labor supply. This is equal tothe percentage change in the labor supply—the growth rate of the labor supply.
K/k is the change in the capital stock divided by the total amount capital. This isK equal to the percentage change in the capital stock—the growth rate of capital.
aN
is called the elasticity of output with respect to labor. It is the percentage increasein output resulting from a 1% increase in labor used.
aK
is called the elasticity of output with respect to capital. It is the percentageincrease in output resulting from a 1% increase in the capital stock.
Growth Dynamics: The Solow Model
We now take a look at a very popular model of economic growth, developed in the1950s by Nobel Prize winning economist Robert Solow.There are a lot of symbols that go into this model.C consumptionc consumption per worker = C/Nd depreciation rate of the capital stock I investmentK size of the capital stock k capital per worker = K/NN size of the labor supplyn growth rate of the labor supplyS national savingss the national savings rate = S/Yt a subscript used to denote year “t”

Y real GDPy real GDP per worker = Y/N
( )
f   y
=
This is the dynamic production function. It indicates that for year t output per worker, y, depends on the amount of available capital per worker.y
t
y
t
= f(k
t
)
t
The production function slopes upward from left to right because an increase in theamount of capital per worker allows each worker to produce more output.The bowed shape reflects the diminishing marginal productivity of capital.Steady state is a situation in which the economy’ y
t
, c
t
, and k
t
are constant.In the steady state I
t
is devoted in two purposes:Replacing capital.Expanding the size of the capital stock.In the steady state the gross domestic investment is:
( )
n I
+=

Golden rule
- is the level of the K-L ratio that maximizes consumption per worker in thesteady state. This is known by this name because it maximizes the economic welfare offuture generations
The Fundamental Determinants of Long–Run Living Standardsa. The Saving Rate
If the saving rates increase there will be an increase in investment. This shifts the sf(k)upwards increasing the K-L ratio equilibrium point.
b. Population Growth
This implies a change in n.An increase in the rate of population growth will reduce the steady state investment per worker. With higher population growth more output is used to equip new workers. Thisreduces the output available to consumptions or to increase capital per worker.

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