( ) = ( ) = ( + ) which means that both capital and output grow permanently at a constant rate

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "( ) = ( ) = ( + ) which means that both capital and output grow permanently at a constant rate"

Transcription

1 1 Endogenous Growth We present two models that are very popular in the, so-called, new growth theory literature. They represent economies where, notwithstanding the absence of exogenous technical progress, output per capita grows permanently. 1.1 AK Model Consider the production function = which is linear in the aggregate capital stock. Assume population grows at rate. Denoting per-capita variables with small letters, the growth rate of output per capita is therefore = equal to the growth rate of capital per capita. The Solow growth equation, in per capita terms, is = ( + ) = ( + ) which means that both capital and output grow permanently at a constant rate = ( + ) As long as ( + ) this economy displays positive long-run growth, notwithstanding the absence of exogenous productivity growth. This class of models where output per capita grows without the need of exogenous technical progress are called endogenous growth models. Notice that this (linear) economy is a limiting case of the Solow model as the capital share 1 When =1 the decreasing returns in production which are the force that impede permanent growth in the standard Solow model, disappear and output is produced with constant returns to capital. 1

2 An alternative, complementary, way to explain why this economy displays endogenous growth is that the reproducible factor (capital in this case) is produced without decreasing marginal returns, i.e. investment (new capital) can be generated with a production structure that is linear in physical capital = = The lesson we learn from the model is about the mathematical structure of models that is needed to generate long-run growth. We need some way to stop the decreasing marginal returns to the factors of production. Finally, note that in the model there is no conditional convergence. Take two countries with the same set of parameters ( ) but two different initial conditions for capital 0 (and hence income 0 = 0 ) The initial gap will perpetuate forever, since the two economies will grow at the same rate. 1.2 Human Capital Consider an economy without physical capital, but with human capital, where output is produced with = [ ] 1 The term denotes the fraction of time endowment (normalized to 1) devoted to production by each worker. So, in per capita terms = 1 (1) where = Human capital per worker is accumulated over time with = (1 ) (2) i.e., the fraction of time 1 is devoted to human capital accumulation. For example, one could think of 1 as the fraction of years spent in school, or fraction of time devoted to on-the-job learning at work. What is the growth rate of output per capita in this economy? Differentiating (1) with respect to time, we arrive at = +(1 ) (3) We are interested in a balanced growth path where { } grow at the same, constant rate forever. This is the equilibriumwealways focusoningrowthmodels 2

3 becausethedatasuggestthat,inthepast,thegrowthexperienceonmanycountrieshas followed this pattern [remember the Kaldor facts?]. Now, can grow at a constant rate indefinitely? No, it s a fraction of time, so along the balanced growth path it must be constant at some value independent of time. 1 Hence, =0and, using (3) and (2) we conclude that the growth rate of output per capita in the long-run is = = (1 ) (4) Output growth is faster the larger is the share of human capital in production the higher is the productivity of human capital accumulation and the more time is devoted to learning (1 ) Why do we have endogenous growth in this model? Because there are no decreasing returns in the production of the reproducible factor, human capital in this case, i.e., the accumulation function of human capital (2) is linear. How do we take stock of the human capital model? If we stare at equation (4) we learn three lessons: 1. The productivity of the education sector (the parameter ) translatesintofaster growth. Countries with better education system, which make the best use of resources to train students, which have the best teachers, etc., will produce more human capital. 2. The share of human capital in production translates into faster growth. Think of Nigeria and the US. In Nigeria the share of agriculture in production is much larger than in the US and agriculture is not a very human capital-intensive sector. Thus human capital accumulation in Nigeria cannot generate too much growth anyway because it impacts only a small fraction of sectors in the economy. 3. The time devoted to education and training (1 ) translates into faster growth. This is something we saw in the stylized facts about income per capita differences: years of schooling of the population and income per capita are very positively correlated. 1 The value of along the balanced growth path can be determined precisely as a function of the parameters of the model, but we omit this derivation here. 3

4 1.3 Research and Development (R&D) We now develop a growth model based on R&D. By R&D we denote all the innovative activities done by the set of people who are, broadly speaking, innovators (scientists, researchers, managers,...). R&D activities advance the frontier of knowledge of society, hence its productivity. However, note that only few countries in the world (the most advanced ones, e.g. the U.S., Europe, Japan) devote large resources to research activities, so this is a model that at most can explain the different growth experiences of those countries. To think about North-South differences (e.g., US and Nigeria) one should explain why underdeveloped countries do not adopt innovations developed by the North, not so much why they do not innovate themselves. Lack of human capital may be one of the reasons. Let s present the model. Consider an economy where labor grows at rate. At every point in time, workers can allocate their time endowment between two sectors: production and research and development ( & ). The production sector produces output with = [ ] 1 where is the level of knowledge generated through & and is the time devoted to production. In per capita terms (i.e., dividing by ), the above equation becomes = [ ] 1 The research sector produces new ideas with = [(1 ) ] (5) hence new ideas necessitates past ideas and time from workers (e.g., scientists) to be developed. When 1 there are decreasing returns to scientists in the production of ideas and when 1 there are decreasing returns to existing knowledge. Along the balanced growth path output and capital grow at the same rate and the fraction of time devoted to labor in each sector has to remain constant (similarly to the human capital model), thus = +(1 ) = (6) What is the growth rate of knowledge? Dividing equation (5) by we obtain = 1 [(1 ) ] (7) 4

5 Differentiating once more this equation with respect to time, and imposing the balanced growth conditions that 1) the growth rate of knowledge is constant (since the growth rate of output is constant by assumption), and 2) the allocation of labor in production is constant at,wehave 0=( 1) + which implies that output grows at the long-run rate Some remarks are in order: = = = Growth here is in part exogenous, because it depends on exogenous population growth. Indeed these models are called semi-endogenous growth models. The reason we have long-run growth in income per capita thanks to population growth is that as population grows, more workers can be allocated into the & sector which offsets the decreasing returns to ideas when 1 2. Clearly, when =1and ideas are produced without decreasing returns, growth becomes fully endogenous. From equations (6) (7) and =1we obtain = = [(1 ) ] (8) This equation also clarifies that we don t need population growth in this case to have permanent growth. A problem arising in this case though is that there are scale effects in growth, i.e. the larger is the economy, in terms of population, the faster should be growth. This conjecture which is not supported by the empirical evidence... although that was before China and India took off. 1.4 The Role of Government Policy: Exogenous vs Endogenous Growth There is a key difference between the effect of policies in the Solow model with exogenous technical change and in endogenous growth models. In endogenous growth models, government policies have effects on the long-run permanent growth rate of the economy, 5

6 while in the Solow model with exogenous growth they only affect the steady-state income per capita, and therefore, only transitional growth towards the new steady state. For example, a subsidy to time spent in education in the human capital accumulation economy will increase (1 ) and the long-run growth rate of output, whereas a subsidy to saving in the Solow model only increases steady-state output and affects growth temporarily, until the economy converges to the new steady-state. Many of the structural reforms that would induce faster long-run growth, such as a subsidy to education would induce, in the short run, a decrease in the growth rate, as the economy diverts resources away from production into accumulation of human capital. Therefore, in the transition towards the new growth regime, output may be growing at a slower rate, or may be even lower. The nature of structural reforms is that they trade lower output in the short run for higher output in the long run. For this reason, structural reforms are so difficult to accept. 6

Lecture 6: The neo-classical growth model

Lecture 6: The neo-classical growth model Lecture 6: The neo-classical growth model February 23, 2009 1 The main sources of divergence in GDP per capita across countries A first source of difference in GDP per capita is the stock of physical capital.

More information

Intermediate Macroeconomics

Intermediate Macroeconomics Intermediate Macroeconomics Lecture 2 - Growth Facts & the Malthusian Model Zsófia L. Bárány Sciences Po 2014 January Hall and Jones 1999, QJE: In 1988 output per worker in the United States was more than

More information

Chapter 6 Economic Growth: Malthus and Solow

Chapter 6 Economic Growth: Malthus and Solow Chapter 6 Economic Growth: Malthus and Solow Overview This chapter first examines growth under an early growth model based on the writings of Thomas Malthus. The model predicts that the standard of living,

More information

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1

Economic Growth. (c) Copyright 1999 by Douglas H. Joines 1 Economic Growth (c) Copyright 1999 by Douglas H. Joines 1 Module Objectives Know what determines the growth rates of aggregate and per capita GDP Distinguish factors that affect the economy s growth rate

More information

University of Saskatchewan Department of Economics Economics 414.3 Homework #1

University of Saskatchewan Department of Economics Economics 414.3 Homework #1 Homework #1 1. In 1900 GDP per capita in Japan (measured in 2000 dollars) was $1,433. In 2000 it was $26,375. (a) Calculate the growth rate of income per capita in Japan over this century. (b) Now suppose

More information

Assignment 3. Chapter 7 Chapter 8. Last Name. First Name. Page 1

Assignment 3. Chapter 7 Chapter 8. Last Name. First Name. Page 1 Assignment 3 Last Name First Name Chapter 7 Chapter 8 1 a b c d 1 a b c d 2 a b c d 2 a b c d 3 a b c d 3 a b c d 4 a b c d 4 a b c d 5 a b c d 5 a b c d 6 a b c d 6 a b c d 7 a b c d 7 a b c d 8 a b c

More information

Endogenous Growth Theory

Endogenous Growth Theory Endogenous Growth Theory Motivation The Solow and Ramsey models o er valuable insights but have important limitations: Di erences in capital accummulation cannot satisfactorily account for the prevailing

More information

4. In the Solow model with technological progress, the steady state growth rate of total output is: A) 0. B) g. C) n. D) n + g.

4. In the Solow model with technological progress, the steady state growth rate of total output is: A) 0. B) g. C) n. D) n + g. 1. The rate of labor augmenting technological progress (g) is the growth rate of: A) labor. B) the efficiency of labor. C) capital. D) output. 2. In the Solow growth model with population growth and technological

More information

Economic Growth I: Capital Accumulation and Population Growth

Economic Growth I: Capital Accumulation and Population Growth CHAPTER 8 : Capital Accumulation and Population Growth Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the closed economy Solow model how

More information

Endogenous Growth Theory

Endogenous Growth Theory Chapter 3 Endogenous Growth Theory 3.1 One-Sector Endogenous Growth Models 3.2 Two-sector Endogenous Growth Model 3.3 Technological Change: Horizontal Innovations References: Aghion, P./ Howitt, P. (1992),

More information

Figure 1: Real GDP in the United States 1875-1993

Figure 1: Real GDP in the United States 1875-1993 Macroeconomics Topic 2: Explain the role of capital investment, education, and technology in determining economic growth. Reference: Gregory Mankiw s Principles of Macroeconomics, 2 nd edition, Chapter

More information

Advanced Macroeconomics

Advanced Macroeconomics Advanced Macroeconomics The Solow growth model Günter W. Beck University of Mainz November 23, 2010 Günter W. Beck Advanced Macroeconomics November 23, 2010 1 / 34 Overview 1 Some empirical facts 2 The

More information

Macroeconomic Models of Economic Growth

Macroeconomic Models of Economic Growth Macroeconomic Models of Economic Growth J.R. Walker U. of Wisconsin Human Resources and Economic Growth Transition: History to Contemporary Spent the last few lectures considering the Industrial Revolution.

More information

Economic growth is a study of the economy in the very long run. What is economic growth?

Economic growth is a study of the economy in the very long run. What is economic growth? Econ 2950 Chapter 7 Economic Growth Theory I Introduction to Economic Growth Economic growth is a study of the economy in the very long run. What is economic growth? Example: Jan 1, 2009 RGDP is $1.2 trillion

More information

CHAPTER 7 Economic Growth I

CHAPTER 7 Economic Growth I CHAPTER 7 Economic Growth I Questions for Review 1. In the Solow growth model, a high saving rate leads to a large steady-state capital stock and a high level of steady-state output. A low saving rate

More information

Preparation course MSc Business&Econonomics: Economic Growth

Preparation course MSc Business&Econonomics: Economic Growth Preparation course MSc Business&Econonomics: Economic Growth Tom-Reiel Heggedal Economics Department 2014 TRH (Institute) Solow model 2014 1 / 27 Theory and models Objective of this lecture: learn Solow

More information

Generic Analysis of Endogenous Growth Models

Generic Analysis of Endogenous Growth Models c December 24, 2016, Christopher D. Carroll Endogenous Generic Analysis of Endogenous Growth Models The neoclassical theory of economic growth, as formulated by Solow (1956), and Cass (1965)-Koopmans (1965),

More information

Long-Run Economic Growth. Chapter 4.3 and 4.4

Long-Run Economic Growth. Chapter 4.3 and 4.4 Long-Run Economic Growth Chapter 4.3 and 4.4 Outline Malthusian stagnation and the demographic transition The Solow growth model Ch.2 Economic Performance 1 slide 1 4.3 Malthusian Stagnation and the Demographic

More information

Economic Growth. Chapter 11

Economic Growth. Chapter 11 Chapter 11 Economic Growth This chapter examines the determinants of economic growth. A startling fact about economic growth is the large variation in the growth experience of different countries in recent

More information

Review Questions - CHAPTER 8

Review Questions - CHAPTER 8 Review Questions - CHAPTER 8 1. The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is: A) c* = f(k*) δk*. B) c* = f(k*) + δk*. C) c* =

More information

Technology and Economic Growth

Technology and Economic Growth Technology and Economic Growth Chapter 5 slide 0 Outline The Growth Accounting Formula Endogenous Growth Theory Policies to Stimulate Growth The Neoclassical Growth Revival Real wages and Labor Productivity

More information

Economics 304 Fall 2014

Economics 304 Fall 2014 Economics 304 Fall 014 Country-Analysis Project Part 4: Economic Growth Analysis Introduction In this part of the project, you will analyze the economic growth performance of your country over the available

More information

Economic Growth II: Technology, Empirics, and Policy

Economic Growth II: Technology, Empirics, and Policy CHAPTER9 : Technology, Empirics, and Policy Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: how to incorporate technological progress in

More information

Chapter 4 Technological Progress and Economic Growth

Chapter 4 Technological Progress and Economic Growth Chapter 4 Technological Progress and Economic Growth 4.1 Introduction Technical progress is defined as new, and better ways of doing things, and new techniques for using scarce resources more productively.

More information

Before Growth: The Malthusian Model

Before Growth: The Malthusian Model University College Dublin, Advanced Macroeconomics Notes, 2015 (Karl Whelan) Page 1 Before Growth: The Malthusian Model We have devoted the last few weeks to studying economies that grow steadily over

More information

E322_Summer_08_Intermediate Macroeconomics. Final Exam: Sample Questions

E322_Summer_08_Intermediate Macroeconomics. Final Exam: Sample Questions E322_Summer_08_Intermediate Macroeconomics Final Exam: Sample Questions Chapter_05 1. A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that (a) anyone

More information

Introduction to the Economic Growth course

Introduction to the Economic Growth course Economic Growth Lecture Note 1. 03.02.2011. Christian Groth Introduction to the Economic Growth course 1 Economic growth theory Economic growth theory is the study of what factors and mechanisms determine

More information

6.2 The Economics of Ideas. 6.1 Introduction. Growth and Ideas. Ideas. The Romer model divides the world into objects and ideas: Chapter 6

6.2 The Economics of Ideas. 6.1 Introduction. Growth and Ideas. Ideas. The Romer model divides the world into objects and ideas: Chapter 6 The Romer model divides the world into objects and ideas: Chapter 6 and Ideas By Charles I. Jones Objects capital and labor from the Solow model Ideas items used in making objects Media Slides Created

More information

Economic growth rate and the implications of sustained growth. The economic growth trends in Canada and other countries and regions

Economic growth rate and the implications of sustained growth. The economic growth trends in Canada and other countries and regions 22 Economic Growth Learning Objectives Economic growth rate and the implications of sustained growth The economic growth trends in Canada and other countries and regions Labour productivity growth and

More information

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k

The Solow Model. Savings and Leakages from Per Capita Capital. (n+d)k. sk^alpha. k*: steady state 0 1 2.22 3 4. Per Capita Capital, k Savings and Leakages from Per Capita Capital 0.1.2.3.4.5 The Solow Model (n+d)k sk^alpha k*: steady state 0 1 2.22 3 4 Per Capita Capital, k Pop. growth and depreciation Savings In the diagram... sy =

More information

Agenda. Long-Run Economic Growth, Part 2. The Solow Model. The Solow Model. Fundamental Determinants of Living Standards. Endogenous Growth Theory.

Agenda. Long-Run Economic Growth, Part 2. The Solow Model. The Solow Model. Fundamental Determinants of Living Standards. Endogenous Growth Theory. Agenda Fundamental Determinants of Living Standards. Long-Run Economic Growth, Part 2 Endogenous Growth Theory. Policies to Raise Long-Run Living Standards. 8-1 8-2 The saving rate. Increasing the saving

More information

Intermediate Macroeconomics

Intermediate Macroeconomics Intermediate Macroeconomics Lecture 1 - Introduction to Economic Growth Zsófia L. Bárány Sciences Po 2011 September 7 About the course I. 2-hour lecture every week, Wednesdays from 12:30-14:30 3 big topics

More information

E-322 Muhammad Rahman. Chapter 7: Part 2. Subbing (5) into (2): H b(1. capital is denoted as: 1

E-322 Muhammad Rahman. Chapter 7: Part 2. Subbing (5) into (2): H b(1. capital is denoted as: 1 hapter 7: Part 2 5. Definition of ompetitive Equilibrium ompetitive equilibrium is very easy to derive because: a. There is only one market where the consumption goods are traded for efficiency units of

More information

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Exam: ECON4310 Intertemporal macroeconomics Date of exam: Thursday, November 27, 2008 Grades are given: December 19, 2008 Time for exam: 09:00 a.m. 12:00 noon

More information

Endogenous Growth Models

Endogenous Growth Models Endogenous Growth Models Lorenza Rossi Goethe University 2011-2012 Endogenous Growth Theory Neoclassical Exogenous Growth Models technological progress is the engine of growth technological improvements

More information

14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth

14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth 14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth Daron Acemoglu MIT December 2, 2014. Daron Acemoglu (MIT) Economic Growth Lecture 11 December 2, 2014. 1 / 43 Introduction

More information

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.

Name: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed. Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a

More information

4.2 A Model of Production. 4.1 Introduction. A Model of Production. Setting Up the Model. Chapter 4

4.2 A Model of Production. 4.1 Introduction. A Model of Production. Setting Up the Model. Chapter 4 Chapter 4 A Model of Production By Charles I. Jones Media Slides Created By Dave Brown 4.2 A Model of Production Vast oversimplifications of the real world in a model can still allow it to provide important

More information

Technology and Economic Growth

Technology and Economic Growth Growth Accounting Formula Technology and Economic Growth A. %ΔY = %ΔA + (2/3) %ΔN + (1/3) %ΔK B. Ex. Suppose labor, capital, and technology each grow at 1% a year. %ΔY = 1 + (2/3) 1 + (1/3) 1 = 2 C. Growth

More information

1 National Income and Product Accounts

1 National Income and Product Accounts Espen Henriksen econ249 UCSB 1 National Income and Product Accounts 11 Gross Domestic Product (GDP) Can be measured in three different but equivalent ways: 1 Production Approach 2 Expenditure Approach

More information

The Budget Deficit, Public Debt and Endogenous Growth

The Budget Deficit, Public Debt and Endogenous Growth The Budget Deficit, Public Debt and Endogenous Growth Michael Bräuninger October 2002 Abstract This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The

More information

The Neo-classical Growth Model (also known as the Solow Growth Model)

The Neo-classical Growth Model (also known as the Solow Growth Model) The Neo-classical Growth Model (also known as the Solow Growth Model) There are many factors that influence the growth rate of economies. Among them are the quantity of physical capital (K), the level

More information

Note on growth and growth accounting

Note on growth and growth accounting CHAPTER 0 Note on growth and growth accounting 1. Growth and the growth rate In this section aspects of the mathematical concept of the rate of growth used in growth models and in the empirical analysis

More information

Development Economics Lecture 5: Productivity & Technology

Development Economics Lecture 5: Productivity & Technology Development Economics Lecture 5: Productivity & Technology Måns Söderbom University of Gothenburg mans.soderbom@economics.gu.se www.soderbom.net 1 Measuring Productivity Reference: Chapter 7 in Weil. Thus

More information

Problem 1. Steady state values for two countries with different savings rates and population growth rates.

Problem 1. Steady state values for two countries with different savings rates and population growth rates. Mankiw, Chapter 8. Economic Growth II: Technology, Empirics and Policy Problem 1. Steady state values for two countries with different savings rates and population growth rates. To make the problem more

More information

Study Problems for Midterm Exam 1

Study Problems for Midterm Exam 1 Study Problems for Midterm Exam 1 As promised important formulas from the textbook are reproduced below, with their textbook equation number and page number listed to the right. s θ = (1 + g )(1 + n) (1

More information

k = sf(k) (δ + n + g)k = 0. sy (δ + n + g)y 2 = 0. Solving this, we find the steady-state value of y:

k = sf(k) (δ + n + g)k = 0. sy (δ + n + g)y 2 = 0. Solving this, we find the steady-state value of y: CHAPTER 8 Economic Growth II Questions for Review 1. In the Solow model, we find that only technological progress can affect the steady-state rate of growth in income per worker. Growth in the capital

More information

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The Ramsey-Cass-Koopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous

More information

Midterm Exam Solutions

Midterm Exam Solutions 14.06 Macroeconomics Spring 2003 Part A (True, false or uncertain) Midterm Exam Solutions 1. An economy that increases its saving rate will experience faster growth. Uncertain. In the Solow model an economy

More information

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.

TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)

More information

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory

Great Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory Great Depressions from a Neoclassical Perspective Advanced Macroeconomic Theory 1 Review of Last Class Model with indivisible labor, either working for xed hours or not. allow social planner to choose

More information

ECONOMIC GROWTH: THE IMPORTANCE OF EDUCATION AND TECHNOLOGICAL DEVELOPMENT

ECONOMIC GROWTH: THE IMPORTANCE OF EDUCATION AND TECHNOLOGICAL DEVELOPMENT ECONOMIC GROWTH: THE IMPORTANCE OF EDUCATION AND TECHNOLOGICAL DEVELOPMENT January 2009 Arthur Blakemore, Ph.D. University Vice Provost, Department Chair of Economics, and Professor of Economics Berthold

More information

Chapters 7 and 8 Solow Growth Model Basics

Chapters 7 and 8 Solow Growth Model Basics Chapters 7 and 8 Solow Growth Model Basics The Solow growth model breaks the growth of economies down into basics. It starts with our production function Y = F (K, L) and puts in per-worker terms. Y L

More information

Master Economics & Business Understanding the World Economy. Sample Essays and Exercices

Master Economics & Business Understanding the World Economy. Sample Essays and Exercices Master Economics & Business Understanding the World Economy Sample Essays and Exercices Examples of short exercises 1. Decreasing Marginal Product of Capital and Depreciation Consider two sectors using

More information

Chapter 6. Economic Growth: from Malthus to Solow

Chapter 6. Economic Growth: from Malthus to Solow Chapter 6 Economic Growth: from Malthus to Solow Two Primary Phenomena that Macroeconomists study are: Economic Growth Business Cycle Copyright 2005 Pearson Addison-Wesley. All rights reserved. 6-2 Economic

More information

Chapter 7: Economic Growth part 1

Chapter 7: Economic Growth part 1 Chapter 7: Economic Growth part 1 Learn the closed economy Solow model See how a country s standard of living depends on its saving and population growth rates Learn how to use the Golden Rule to find

More information

Economic Development and Gains from Trade

Economic Development and Gains from Trade Economics Education and Research Consortium Working Paper Series Economic Development and Gains from Trade Georgi Trofimov Working Paper No 98/06 This project (No 96-161) was supported by the Economics

More information

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of

More information

MASTER IN ENGINEERING AND TECHNOLOGY MANAGEMENT

MASTER IN ENGINEERING AND TECHNOLOGY MANAGEMENT MASTER IN ENGINEERING AND TECHNOLOGY MANAGEMENT ECONOMICS OF GROWTH AND INNOVATION Lecture 1, January 23, 2004 Theories of Economic Growth 1. Introduction 2. Exogenous Growth The Solow Model Mandatory

More information

Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers. January 22, 2014

Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers. January 22, 2014 Charles Jones: US Economic Growth in a World of Ideas and other Jones Papers January 22, 2014 U.S. GDP per capita, log scale Old view: therefore the US is in some kind of Solow steady state (i.e. Balanced

More information

Chapter 6: Economic Growth: Malthus to Solow

Chapter 6: Economic Growth: Malthus to Solow Chapter 6: Economic Growth: Malthus to Solow El-hadj Bah EC 313-Intermediate Macroeconomics Second Summer Session Arizona State University July, 2007 1 Economic Growth Facts 1. Pre-1800 (Industrial Revolution):

More information

Ghana South Korea United States. Real GDP per capita (2005 dollars) Per centage of 1960 real GDP per capita. 2009 real GDP per capita

Ghana South Korea United States. Real GDP per capita (2005 dollars) Per centage of 1960 real GDP per capita. 2009 real GDP per capita Long-Run Economic Growth chapter: 24 9 ECONOMICS MACROECONOMICS 1. The accompanying table shows data from the Penn World Table, Version 7.0, for real GDP in 2005 U.S. dollars for Argentina, Ghana, South

More information

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE YUAN TIAN This synopsis is designed merely for keep a record of the materials covered in lectures. Please refer to your own lecture notes for all proofs.

More information

Chapter 14 How Economies Grow and Develop Macroeconomics In Context (Goodwin, et al.)

Chapter 14 How Economies Grow and Develop Macroeconomics In Context (Goodwin, et al.) Chapter 14 How Economies Grow and Develop Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter discusses theories of economic growth, highlighting the Solow growth model and the importance

More information

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008)

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008) Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15-16, 2008) A. On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production

More information

Lecture notes 3. Economic growth: Solow model

Lecture notes 3. Economic growth: Solow model Kevin Clinton Winter 2005 Lecture notes 3 Economic growth: Solow model 1. Introduction Solow s classic model is a superb piece of wor, everything you could as of a theory. It taes on the biggest questions

More information

The Real Business Cycle model

The Real Business Cycle model The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian

More information

Solution to Individual homework 2 Revised: November 22, 2011

Solution to Individual homework 2 Revised: November 22, 2011 Macroeconomic Policy Fabrizio Perri November 24 at the start of class Solution to Individual homework 2 Revised: November 22, 2011 1. Fiscal Policy and Growth (50p) After reviewing the latest figures of

More information

Keynesian Growth: the Cambridge versionkeynesian Growth:

Keynesian Growth: the Cambridge versionkeynesian Growth: Keynesian Growth: the Cambridge versionkeynesian Growth: [The Cambridge version] The heroic entrepreneurs of Schumpeter are resurrected, only slightly less heroically, in The General Theory (1936) of J.M.

More information

Econ 201 Macroeconomic Theory I Assignment 1 (Chapter 10, 11,12)

Econ 201 Macroeconomic Theory I Assignment 1 (Chapter 10, 11,12) Econ 201 Macroeconomic Theory I Assignment 1 (Chapter 10, 11,12) 1. Label each of the following statement true, false, or uncertain. Explain briefly. a) In the long-run, capital accumulation affects the

More information

A MALTHUS-SWAN-SOLOW MODEL OF ECONOMIC GROWTH

A MALTHUS-SWAN-SOLOW MODEL OF ECONOMIC GROWTH A MALTHUS-SWAN-SOLOW MODEL OF ECONOMIC GROWTH Luis C. Corchón Departamento de Economía Universidad Carlos III First draft December 24 th 2011. This draft November 24 th 2015 Abstract In this paper we introduce

More information

MACROECONOMICS SECTION

MACROECONOMICS SECTION MACROECONOMICS SECTION GENERAL TIPS Be sure every graph is carefully labeled and explained. Every answer must include a section that contains a response to WHY the result holds. Good resources include

More information

Business regulation and economic growth in the Western Balkan countries

Business regulation and economic growth in the Western Balkan countries EASTERN JOURNAL OF EUROPEAN STUDIES Volume 4, Issue 1, June 2013 5 Business regulation and economic growth in the Western Balkan countries Engjell PERE *, Albana HASHORVA ** Abstract Actually economic

More information

Macroeconomics Lecture 1: The Solow Growth Model

Macroeconomics Lecture 1: The Solow Growth Model Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

More information

The Specific-Factors Model: HO Model in the Short Run

The Specific-Factors Model: HO Model in the Short Run The Specific-Factors Model: HO Model in the Short Run Rahul Giri Contact Address: Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico (ITAM). E-mail: rahul.giri@itam.mx In this

More information

What Drives the Rapid Economic Growth in Azerbaijan? - An Application of the Solow Model

What Drives the Rapid Economic Growth in Azerbaijan? - An Application of the Solow Model What Drives the Rapid Economic Growth in Azerbaijan? - An Application of the Solow Model Shaokai Huang, Master Candidate SHU-UTS SILC Business School, Shanghai University doi: 10.19044/esj.2016.v12n22p380

More information

Define and calculate the economic growth rate, and explain the implications of sustained growth.

Define and calculate the economic growth rate, and explain the implications of sustained growth. Economic Growth Chapter CHAPTER CHECKLIST Chapter 9 discusses the factors that determine economic growth, studies different theories that explain economic growth, and examines possible government polices

More information

Volume 36, Issue 3. A variant of Uzawa's steady-state theorem in a Malthusian model

Volume 36, Issue 3. A variant of Uzawa's steady-state theorem in a Malthusian model Volume 36, Issue 3 A variant of Uzawa's steady-state theorem in a Malthusian model Defu Li School of Economics and management, Tongji University Jiuli Huang School of Economics, Nankai University Abstract

More information

Intermediate Macroeconomics: Economic Growth and the Solow Model

Intermediate Macroeconomics: Economic Growth and the Solow Model Intermediate Macroeconomics: Economic Growth and the Solow Model Eric Sims University of Notre Dame Fall 2012 1 Introduction We begin the course with a discussion of economic growth. Technically growth

More information

Why Does Consumption Lead the Business Cycle?

Why Does Consumption Lead the Business Cycle? Why Does Consumption Lead the Business Cycle? Yi Wen Department of Economics Cornell University, Ithaca, N.Y. yw57@cornell.edu Abstract Consumption in the US leads output at the business cycle frequency.

More information

Economic Growth: Lecture 9, Neoclassical Endogenous Growth

Economic Growth: Lecture 9, Neoclassical Endogenous Growth 14.452 Economic Growth: Lecture 9, Neoclassical Endogenous Growth Daron Acemoglu MIT November 29, 2011. Daron Acemoglu (MIT) Economic Growth Lecture 9 November 29, 2011. 1 / 41 First-Generation Models

More information

Chapter 10: Rural and Urban

Chapter 10: Rural and Urban Chapter 10: Rural and Urban Key Issues 1. The interaction between rural and urban sectors 2. The role of agriculture in the development process 3. The Lewis model 4. The role of the informal sector 5.

More information

Economic Growth: Lecture 2: The Solow Growth Model

Economic Growth: Lecture 2: The Solow Growth Model 14.452 Economic Growth: Lecture 2: The Solow Growth Model Daron Acemoglu MIT October 29, 2009. Daron Acemoglu (MIT) Economic Growth Lecture 2 October 29, 2009. 1 / 68 Transitional Dynamics in the Discrete

More information

Chapter 14: Production Possibility Frontiers

Chapter 14: Production Possibility Frontiers Chapter 14: Production Possibility Frontiers 14.1: Introduction In chapter 8 we considered the allocation of a given amount of goods in society. We saw that the final allocation depends upon the initial

More information

Chapter 3 Product Variety

Chapter 3 Product Variety Chapter 3 Product Variety April 2, 2008 1 Introduction The inability of the AK paradigm to produce a convincing model of long-run growth and convergence motivated a second wave of endogenous growth theory,

More information

Long Run Growth Solow s Neoclassical Growth Model

Long Run Growth Solow s Neoclassical Growth Model Long Run Growth Solow s Neoclassical Growth Model 1 Simple Growth Facts Growth in real GDP per capita is non trivial, but only really since Industrial Revolution Dispersion in real GDP per capita across

More information

Sources of U.S. Economic Growth in a World of Ideas

Sources of U.S. Economic Growth in a World of Ideas Sources of U.S. Economic Growth in a World of Ideas By CHARLES I. JONES* Rising educational attainment and research intensity in recent decades suggest that the U.S. economy is far from its steady state.

More information

Finance 30220 Solutions to Problem Set #3. Year Real GDP Real Capital Employment

Finance 30220 Solutions to Problem Set #3. Year Real GDP Real Capital Employment Finance 00 Solutions to Problem Set # ) Consider the following data from the US economy. Year Real GDP Real Capital Employment Stock 980 5,80 7,446 90,800 990 7,646 8,564 09,5 Assume that production can

More information

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona 2007/8 The problem of non-renewable energy resources in the production of physical capital Agustin Pérez-Barahona CORE DISCUSSION PAPER 2007/8 The problem of non-renewable energy resources in the production

More information

Econ 102 Economic Growth Solutions. 2. Discuss how and why each of the following might affect US per capita GDP growth:

Econ 102 Economic Growth Solutions. 2. Discuss how and why each of the following might affect US per capita GDP growth: Econ 102 Economic Growth Solutions 2. Discuss how and why each of the following might affect US per capita GDP growth: a) An increase of foreign direct investment into the US from Europe is caused by a

More information

A Unified Theory of the Evolution of International Income Levels

A Unified Theory of the Evolution of International Income Levels September 5, 2003 Preliminary A Unified Theory of the Evolution of International Income Levels Stephen L. Parente and Edward C. Prescott * ABSTRACT: This paper develops a theory of the evolution of international

More information

Unemployment in the Long-Run. Instructor: Dmytro Hryshko

Unemployment in the Long-Run. Instructor: Dmytro Hryshko Unemployment in the Long-Run Instructor: Dmytro Hryshko 1 / 44 Outline The natural rate of unemployment What causes unemployment? Job search Wage rigidities 2 / 44 Unemployment rate in the US Back 3 /

More information

Flooding in the Kashmir Valley: Macroeconomic Effects of a Natural Disaster in India

Flooding in the Kashmir Valley: Macroeconomic Effects of a Natural Disaster in India Gettysburg Economic Review Volume 8 Article 8 2015 Flooding in the Kashmir Valley: Macroeconomic Effects of a Natural Disaster in India Danielle Cupp Gettysburg College Class of 2016 Follow this and additional

More information

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to:

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to: The Golden Rule Choosing a National Savings Rate What can we say about economic policy and long-run growth? To keep matters simple, let us assume that the government can by proper fiscal and monetary policies

More information

Sources of U.S. Economic Growth in a World of Ideas

Sources of U.S. Economic Growth in a World of Ideas Sources of U.S. Economic Growth in a World of Ideas Charles I. Jones U.C. Berkeley and NBER chad@econ.berkeley.edu http://elsa.berkeley.edu/~chad American Economic Review, forthcoming August 17, 2001 Version

More information

Hello, my name is Olga Michasova and I present the work The generalized model of economic growth with human capital accumulation.

Hello, my name is Olga Michasova and I present the work The generalized model of economic growth with human capital accumulation. Hello, my name is Olga Michasova and I present the work The generalized model of economic growth with human capital accumulation. 1 Without any doubts human capital is a key factor of economic growth because

More information

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one Name: Final Exam Econ 219 Spring 2005 This is a closed book exam. You are required to abide all the rules of the Student Conduct Code of the University of Connecticut. You can skip one multiple choice

More information

Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2

Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2 Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2 1 Consumption with many periods 1.1 Finite horizon of T Optimization problem maximize U t = u (c t ) + β (c t+1 ) + β 2 u (c t+2 ) +...

More information

Total Factor Productivity

Total Factor Productivity Total Factor Productivity Diego Comin NewYorkUniversityandNBER August 2006 Abstract Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. The

More information

The Future of U.S. Economic Growth

The Future of U.S. Economic Growth The Future of U.S. Economic Growth By JOHN G. FERNALD AND CHARLES I. JONES Arguably the most important fact of the last century is the steady rise in living standards throughout much of the world. Will

More information