# L2 - Economic Growth Introduction Chapter 3 book 1 and...

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Economic Growth: Introduction Chapter 3, book 1, and Chapter 1, book 2 Facts and questions The production function The Solow model 1

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Motivation The current per capita GDP is 5,000 dollars. The per capita GDP after 70 years is 10, 000, if the annual grow rate is 1 percent; 20, 000 if the annual grow rate is 2 percent; 40, 000 if the annual grow rate is 3 percent; 2
80,000 if the annual grow rate is 4 percent. The U.S. GDP per capita is 6,450 dollars (in 1992 dollar) in 1929, and 26,019 (in 1992 dollar) in 1996. The average growth rate is 2.2 percent. But if the growth rate is 4.4 percent, then GDP per is 97,884 in 1996. The key point: The small diﬀerences become large in the long run because diﬀerences compound. 3

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Facts OECD on average rapid and stable growth rate near two centuries (with some productivity slowdown since 1980) (book 1, pp. 43-45); The U.S.: the growth rate is low among OECD countries (book 2, pp. 22-24); convergence (book 1, pp. 82-85) Non OECD on average on average low growth rate; some catch up, but many do not; divergence (book 1, pp. 38-44; book 2, pp 24-26). 4
Questions What factors caused some countries to grow fast and others to grow slow over periods such as 1960 to 2000? In particular, why did the East Asian countries do so much better than the sub-Saharan African countries? How did countries such as the United States and other OECD members sustain growth rates of real GDP per person of around 2 percent per year for a century or more? What can policymakers do to increase growth rates of real GDP per person? 5

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Aggregate production fucntion The production function is in the form of Y = A · F ( K,L ) . A
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L2 - Economic Growth Introduction Chapter 3 book 1 and...

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