Lecture 6: The neo-classical growth model

Size: px
Start display at page:

Download "Lecture 6: The neo-classical growth model"

Transcription

1 Lecture 6: The neo-classical growth model February 23, 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. Physical capital consists in the all the non-labor inputs. e.g machines, vehicles, buildings, and other pieces of equipment. For example, in 2000 the average US worker had $148,091 worth of capital to work with; in Mexico in the same year, the capital per worker was $42,991 and in India it was $ Question: where do the differences in physical capital stocks come from? Answer: from differences in investment rates, which themselves come from differences in savings (savings rates, initial income) Second source of difference in GDP per capita: productivity, i.e how much output is produced with each unit of capital. 1. First source of productivity difference: technology, i.e the amount of knowledge accessible to producers in different countries. Technology is acquired through innovations (R&D investments) and imitation of technologies from more advanced countries. 2. Second source of productivity difference: efficiency, which relates more to the organization of the economy, institutions, and so on. Of course, to get a good understanding of the differences in GDP per capita and of growth rates across countries, one must go further and understand what ultimately determines savings, R&D investments, technological diffusion, productive efficiency in firms and markets. 2 The neo-classical growth model his lecture presents a capital-based theory of why countries differ in their levels of income per capita, and why less advanced countries may or may not converge (in per capita GDP) towards more advanced countries. 1

2 2.1 The nature of capital Five main characteristics of (physical) capital: 1. Capital is productive: it raises the amount of output a worker can produce 2. Capital is itself produced. The process of producing capital is called investment. Because it is produced, capital requires sacrifice of some consumption. In the US, in 2000, 1.76 trillion dollars, i.e 18%, were spent on investment. 3. Capital is rival in its use: only a limited amount of people can use a given piece of capital at a given moment in time; this distinguishes capital from ideas, which in turn are produced through another kind of investment: R&D investment. 4. Capital earns a return from renting it. However some capital goods like roads and ports are built and owned by governments. 5. Capital depreciates, both due to physical obsolescence and also because the arrival of new technologies make capital goods that embody old technologies, become obsolete. 2.2 The first equation of the Solow model The first equation you already know: Y = AK α L 1 α, (1) where the left-hand side is the current flow of output, and the right hand side is equal to a technology parameter A times the capital contribution times the labor contribution. Remember that: K MPK = αy, so that α = K MPK Y is the capital s share of output. Figure 3.3 shows that share for a sample of 53 countries. The average is about 1/ The second equation of the Solow model Growth rate in discrete time, between t and t +1: g t (z) = z t+1 z t z t. 2

3 Growth rate in continuous time: g t (z) = dz dt /z = z z = bz; Second equation of the Solow model: dk = sy δk, dt that is: net current capital accumulation is equal to total current investment (itself equal to total savings in equilibrium of the goods market) minus total current depreciation of the capital stock. 2.4 Steady state Fix labor supply at L =1. The steady-state level of capital is simply determined by: dk dt =0, or equivalently sy = sak α = δk, or equivalently again: K = K ss =( sa δ ) 1 1 α. This steady state is stable, in the sense that starting from a level of capital K<K ss, capital will accumulate until the capital stock reaches its steadystate level K = K ss ; similarly, starting from a level of capital K>K ss, capital will decumulate until the capital stock reaches K = K ss. To this steady-state level of capital corresponds a steady state level of output: Y ss = A(K ss ) α = A 1 α 1 s ( δ ) 1 α α. Remarks: 1. This latter equation provides us with a theory of the sources of (longrun) income differences across countries: in particular (per capita) GDP across two countries may differ either due to differences in productivity as captured by A, or because of differences in savings or investment rate rate as captured by s. Thus, suppose, that we abstract from differences in technologies and concentrate in differences in savings or investment rates, and compare the predicted ratio of income per worker in each country to income per worker in the US, to the ratio of actual incomes between that country and the US. We are very far from the 45 0 line. In particular, Uganda should have a 3

4 GDP per capita of around 33% of US GDP per capita, however the true ratio is only 3%. Why? Maybe Uganda still lies very far from its steady-state, whereas US lies close to its steady-state. 2. The Solow model predicts no growth of GDP per capita in the longrun, since output per capita converges to a fixed value Y ss. The reason for this no-growth in steady state result, is the assumption of decreasing returns to capital accumulation and therefore of decreasing savings to output ratio, whereas depreciation occurs at a constant rate; so, eventually, depreciation catches up with savings. 2.5 Convergence The Solow model predicts cross-country convergence: namely, a country very far from its steady-state will grow very fast, whereas a country very close from its steady-state will grow very slowly. For example, suppose that all countries have the same savings rate, productivity parameter, and depreciation rate, but the only difference between them is that they start from different levels of capital stocks (and therefore from different income levels). The growth rate of capital stock is equal to: bk = dk dt /K = sakα 1 δ, thus since α<1, we see that the higher the current level of capital, the lower the growth rate of the capital stock, and therefore thelowerthegrowthrateofoutput since by = αk. b Thus the country will lower current level of its capital stock will grow faster than the country with the higher level of its current capital stock. Note also that the Solow model leads to the following additional predictions: 1. if two countries have the same rate of investment but different levels of income, then the country with lower income will grow faster; 2. if two countries have the same level of income but different rates of investment, then the country with a higher rate of investment will have higher growth; 3. a country that raises its level of investment will experience an increase in its growth rate of income. While the Solow model predicts convergence to the same steady state for all countries or regions with similar savings rates s, depreciation rates δ and productivity parameter A, it does not explain why some countries manage to converge towards the most advanced countries and why others 4

5 stagnate and do not converge. This phenomenon we refer to as club convergence. The Solow model also does not explain why some countries started to grow very fast and then stopped converging. While the convergence prediction appears to be (partly) verified by crosscountry (or by cross-state data within the US), the prediction of zero long-run growth is at odds with the evidence that growth in developed countries has been sustained at 2 to 3% per year. So, how can extend the Solow model to account for positive long-run growth? 1. allow for technical progress in the form of a permanent growth in productivity A. However, the problem is that we cannot explain how this technological progress will be remunerated, especially since the Euler theorem implies that once you pay capital and labor at their marginal productivities, you simply exhaust total output Y and therefore there is nothing left to pay innovators. 2. allow for population growth; however this will affect the growth of total output, not the steady-state result on output per capita: suppose Y = AK α L 1 α, with L = e nt = y = Ak α, where y = Y/L and k = K/L. Also, one can show that equation (2) implies: dk = sy δk. dt So, we are back to the previous model, which implies that k converges to a steady-state level k ss and y converges to a steady-state level y ss. This implies that in the long run, total GDP Y grows at same rate as population, that is at rate n, but per capita GDP stops growing in the long-run. 2.6 A first glimpse at the AK model A first attempt at endogeneizing the long-run growth rate, was to say that even though individual firms may experience decreasing to capital accumulation at an individual level, yet, because of externalities in learning by doing across firms (or externalities in capital accumulation across firms), at the aggregate level the production function might exhibit constant returns to capital only, namely: Y = A 0 K. This view of the world identifies knowledge accumulation with capital accumulation by all firms simultaneously. 5

6 Now, let us replace the first equation in the Solow model by this equation, and put it together with the second equation of the Solow model; we have: and therefore: dk dt = sa 0K δk, bk = sa 0 δ. We thus get a positive long-run rate of growth, which depends positively on the savings rate and negatively on the depreciation rate. However, if we restore positive long-run growth, we also lose the convergence result of the Solow model since all countries no matter their current capital stock growth at the same rate. Therefore less advanced countries can no longer catch up with more advanced countries since they do not grow faster than more advanced countries. Note that the learning-by-doing externality must be exactly right in order to obtain an aggregate AK function. More generally, externalities will lead us to an aggregate function of the form: Y = A 0 K β, where β>α. If β>1, then we get explosive growth ( K b increases with K), whereas if β<1 we obtain zero growth in the long-run as we are back to the Solow model but with a higher coefficient of capital. Early attempts at justifying the AK model on empirical grounds, relied on the observation that the Solow model with α =1/3 predicts too fast a speed of convergence compared to what we seem to observe across countries or across US states. However, next time we shall see that there is a simple way to extend the Solow model so as to deal with this problem: namely, by adding human capital on top on physical capital and labor as a third factor of production. In any case, from this subsection we have seen that growth models based on capital accumulation can not explain convergence and long-run growth simultaneously. And they do not account for several important aspects of convergence/divergence across countries. 6

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

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

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

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

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

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

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

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

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 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

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

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

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

Economic Growth. Spring 2013

Economic Growth. Spring 2013 Economic Growth Spring 2013 1 The Solow growth model Basic building blocks of the model A production function Y t = F (K t, L t, A t ) This is a hugely important concept Once we assume this, then we are

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

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics

Outline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, market-clearing model Supply side factors of production determination

More information

Chapter 3 A Classical Economic Model

Chapter 3 A Classical Economic Model Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand

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

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

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

Neoclassical growth theory

Neoclassical growth theory Chapter 1 Neoclassical growth theory 1.1 The Solow growth model The general questions of growth: What are the determinants of long-run economic growth? How can we explain the vast differences in both output

More information

Notes on the Theories of Growth

Notes on the Theories of Growth Notes on the Theories of Growth Economic Growth & Development These recitation notes cover basic concepts in economic growth theory relevant to the cases seen in class (Singapore, Indonesia, Japan, and

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

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

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

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

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

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

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

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

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami

Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami True/false and explain Answer Key to the Sample Final Exam Principles of Macroeconomics Professor Adrian Peralta-Alva University of Miami State whether the following statements are true or false and explain

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

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

The Theory of Investment

The Theory of Investment CHAPTER 17 Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: leading theories to explain each type of investment why investment is negatively

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

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

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

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

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

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

Suggested Answers for Mankiw Questions for Review & Problems

Suggested Answers for Mankiw Questions for Review & Problems Suggested Answers for Mankiw & Problems The answers here will not have graphs, I encourage to refer to the text for graphs. There is a some math, however I don t expect you to replicate these in your exam,

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

Agenda. Long-Run Economic Growth, Part 1. The Sources of Economic Growth. Long-Run Economic Growth. The Sources of Economic Growth

Agenda. Long-Run Economic Growth, Part 1. The Sources of Economic Growth. Long-Run Economic Growth. The Sources of Economic Growth Agenda The Sources of Economic Growth Long-Run Economic Growth, Part 1 Growth Dynamics: 8-1 8-2 Long-Run Economic Growth Countries have grown at very different rates over long spans of time. The Sources

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

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

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

Macroeconomics Questions 2013 Economics Honors Exam

Macroeconomics Questions 2013 Economics Honors Exam Macroeconomics Questions 2013 Economics Honors Exam Question 1. (40 minutes) The savings rates of Chinese households are among the highest in the world. This question asks you to analyze the consequences

More information

Economic Growth: Theory and Empirics (2012) Problem set I

Economic Growth: Theory and Empirics (2012) Problem set I Economic Growth: Theory and Empirics (2012) Problem set I Due date: April 27, 2012 Problem 1 Consider a Solow model with given saving/investment rate s. Assume: Y t = K α t (A tl t ) 1 α 2) a constant

More information

Written exam for the M. Sc. in Economics Summer Economic Growth (Videregående vækstteori) June 7, Four hours. No auxiliary material

Written exam for the M. Sc. in Economics Summer Economic Growth (Videregående vækstteori) June 7, Four hours. No auxiliary material Written exam for the M. Sc. in Economics Summer 2004 Economic Growth (Videregående vækstteori) June 7, 2004 Four hours. No auxiliary material To be answered in Danish or English 1 (The problem set is the

More information

14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model

14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model 14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model Daron Acemoglu MIT November 1 and 3, 2011. Daron Acemoglu (MIT) Economic Growth Lectures 2 and 3 November 1 and 3, 2011. 1 / 96 Solow Growth

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers,

CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers, University of East London ELBS Economics EC201 MACROECONOMICS CLASSICAL THEORY THE ECONOMY IN THE LONG RUN Main reference: N. Gregory Mankiw, Macroeconomics 5/e, Worth Publishers, Chapter 3, National Income:

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

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 22 Economic Growth

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 22 Economic Growth University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 22 Economic Growth 1) Economic growth is A) equal to real GDP per capita multiplied

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

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

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

Handout on Growth Rates

Handout on Growth Rates Economics 504 Chris Georges Handout on Growth Rates Discrete Time Analysis: All macroeconomic data are recorded for discrete periods of time (e.g., quarters, years). Consequently, it is often useful to

More information

Modules 6 and 7: Markets, Prices, Supply, and Demand practice problems. Practice problems and illustrative test questions for the final exam

Modules 6 and 7: Markets, Prices, Supply, and Demand practice problems. Practice problems and illustrative test questions for the final exam Moules 6 an 7: Markets, Prices, Supply, an Deman practice problems Practice problems an illustrative test questions for the final exam (The attache PDF file has better formatting.) This posting gives sample

More information

Prep. Course Macroeconomics

Prep. Course Macroeconomics Prep. Course Macroeconomics Intertemporal consumption and saving decision; Ramsey model Tom-Reiel Heggedal tom-reiel.heggedal@bi.no BI 2014 Heggedal (BI) Savings & Ramsey 2014 1 / 30 Overview this lecture

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas

More information

THE ECONOMY AT FULL EMPLOYMENT: THE CLASSICAL MODEL*

THE ECONOMY AT FULL EMPLOYMENT: THE CLASSICAL MODEL* Chapter 8 THE ECONOMY AT FULL EMPLOYMENT: THE CLASSICAL MODEL* The Classical Model: A Preview Topic: Real Variables 1) Real variables A) are those that determine the cost of living. B) are those that determine

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

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

The Cost of Production

The Cost of Production The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

More information

The Aggregate Production Function Revised: January 9, 2008

The Aggregate Production Function Revised: January 9, 2008 Global Economy Chris Edmond The Aggregate Production Function Revised: January 9, 2008 Economic systems transform inputs labor, capital, raw materials into products. We use a theoretical construct called

More information

GDP: The market value of final goods and services, newly produced WITHIN a nation during a fixed period.

GDP: The market value of final goods and services, newly produced WITHIN a nation during a fixed period. GDP: The market value of final goods and services, newly produced WITHIN a nation during a fixed period. Value added: Value of output (market value) purchased inputs (e.g. intermediate goods) GDP is a

More information

Lesson 7 - The Aggregate Expenditure Model

Lesson 7 - The Aggregate Expenditure Model Lesson 7 - The Aggregate Expenditure Model Acknowledgement: Ed Sexton and Kerry Webb were the primary authors of the material contained in this lesson. Section : The Aggregate Expenditures Model Aggregate

More information

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004

Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.

More information

Comment. Comment * 103

Comment. Comment * 103 Comment N. GREGORY MANKIW Harvard University Comment * 103 Mosteller, E (1995). The Tennessee study of class size in the early school grades. The Future of Children 5(2):113-127. Parente, S., and E. C.

More information

DEMAND AND SUPPLY IN FACTOR MARKETS

DEMAND AND SUPPLY IN FACTOR MARKETS Chapter 14 DEMAND AND SUPPLY IN FACTOR MARKETS Key Concepts Prices and Incomes in Competitive Factor Markets Factors of production (labor, capital, land, and entrepreneurship) are used to produce output.

More information

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth Long Run Economic Growth Agenda Long-run economic growth. Determinants of long-run growth. Production functions. Long-run Economic Growth Output is measured by real GDP per capita. This measures our (material)

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

Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis Cost-Volume-Profit Analysis Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there

More information

Real GDP. Percentage of 1960 real GDP per capita. per capita. 2000 real GDP. (1996 dollars) per capita. Real GDP

Real GDP. Percentage of 1960 real GDP per capita. per capita. 2000 real GDP. (1996 dollars) per capita. Real GDP KrugmanMacro_SM_Ch08.qxp 11/9/05 4:47 PM Page 99 Long-Run Economic Growth 1. The accompanying table shows data from the Penn World Table, Version 6.1, for real GDP in 1996 U.S. dollars for Argentina, Ghana,

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

Guided Study Program in System Dynamics System Dynamics in Education Project System Dynamics Group MIT Sloan School of Management 1

Guided Study Program in System Dynamics System Dynamics in Education Project System Dynamics Group MIT Sloan School of Management 1 Guided Study Program in System Dynamics System Dynamics in Education Project System Dynamics Group MIT Sloan School of Management 1 Solutions to Assignment #4 Wednesday, October 21, 1998 Reading Assignment:

More information

WHY NOT VALUE EQUITY CFs DIRECTLY?

WHY NOT VALUE EQUITY CFs DIRECTLY? WHY NOT VALUE EQUITY CFs DIRECTLY? WHAT HAVE WE DONE SO FAR? Discount the firm s projected Free Cash Flows at their Weighted Average Cost of Capital to get the aggregate value of the firm s securities

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

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

Exam 1 Review. 3. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption.

Exam 1 Review. 3. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption. Exam 1 Review 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high

More information

The Importance of Human Capital for Economic Growth

The Importance of Human Capital for Economic Growth IWIM - Institut für Weltwirtschaft und Internationales Management IWIM - Institute for World Economics and International Management The Importance of Human Capital for Economic Growth Florian Schütt Materialien

More information

MA Macroeconomics 10. Growth Accounting

MA Macroeconomics 10. Growth Accounting MA Macroeconomics 10. Growth Accounting Karl Whelan School of Economics, UCD Autumn 2014 Karl Whelan (UCD) Growth Accounting Autumn 2014 1 / 20 Growth Accounting The final part of this course will focus

More information

Lecture 14 More on Real Business Cycles. Noah Williams

Lecture 14 More on Real Business Cycles. Noah Williams Lecture 14 More on Real Business Cycles Noah Williams University of Wisconsin - Madison Economics 312 Optimality Conditions Euler equation under uncertainty: u C (C t, 1 N t) = βe t [u C (C t+1, 1 N t+1)

More information

Finance, Saving, and Investment

Finance, Saving, and Investment 23 Finance, Saving, and Investment Learning Objectives The flows of funds through financial markets and the financial institutions Borrowing and lending decisions in financial markets Effects of government

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

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information

Practice Problems on the Capital Market

Practice Problems on the Capital Market Practice Problems on the Capital Market 1- Define marginal product of capital (i.e., MPK). How can the MPK be shown graphically? The marginal product of capital (MPK) is the output produced per unit of

More information

Calibration of Normalised CES Production Functions in Dynamic Models

Calibration of Normalised CES Production Functions in Dynamic Models Discussion Paper No. 06-078 Calibration of Normalised CES Production Functions in Dynamic Models Rainer Klump and Marianne Saam Discussion Paper No. 06-078 Calibration of Normalised CES Production Functions

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

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

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

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 7-1 In what ways are national income statistics useful? National income accounting does for the economy as a whole what private accounting does for businesses. Firms

More information

CHAPTER 9 Building the Aggregate Expenditures Model

CHAPTER 9 Building the Aggregate Expenditures Model CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 1-42 2. Saving function/aps/mps 43-56 3. Shifts in consumption and saving functions 57-72 4 Graphs/tables:

More information

Chapter 4 Consumption, Saving, and Investment

Chapter 4 Consumption, Saving, and Investment Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest

More information

International Economics Fall 2011 Exchange Rate Determination, Part 2. Paul Deng Sept. 29 & Oct. 4, 2011

International Economics Fall 2011 Exchange Rate Determination, Part 2. Paul Deng Sept. 29 & Oct. 4, 2011 International Economics Fall 2011 Exchange Rate Determination, Part 2 Paul Deng Sept. 29 & Oct. 4, 2011 1 What to Do With The Huge Trade Surplus? China s FX reserves reached $3.2 trillion in 2011 70% of

More information

Review 3. Table 14-2. The following table presents cost and revenue information for Soper s Port Vineyard.

Review 3. Table 14-2. The following table presents cost and revenue information for Soper s Port Vineyard. Review 3 Chapters 10, 11, 12, 13, 14 are included in Midterm 3. There will be 40-45 questions. Most of the questions will be definitional, make sure you read the text carefully. Table 14-2 The following

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