Lecture5 - The Theory of Economic Growth continued Chapter...

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Unformatted text preview: The Theory of Economic Growth continued Chapter 4 Recap ! Components of Real GDP (Y) ! Consumption (C) ! Investment (I) ! residential structures ! non-residential structures ! producers durable equipment ! changes in business inventories ! Government purchases (G) ! Net exports (NX) 2 2008 Arnav Sheth. All rights reserved. 6/30/08 Real GDP 3 2008 Arnav Sheth. All rights reserved. 6/30/08 Source: BEA Recap ! What Is and Is Not in GDP ! Included in GDP (but should not be) ! replacement of worn-out or obsolete capital ! counting maintenance costs as new investment ! government purchases that could be counted as intermediate goods ! highways, etc. ! Not included in GDP (but should be) ! household production ! depletion of scarce natural resources ! bads ! pollution, crime, etc. ! For a more thorough critique, visit: http://tinyurl.com/5pjyhp 4 2008 Arnav Sheth. All rights reserved. 6/30/08 Economic Growth 5 2008 Arnav Sheth. All rights reserved. Source: World Bank 6/30/08 Recap ! Why do we care about economic growth? ! Why are We So Rich and They So Poor? ! What is the engine of economic growth? ! How can everyone get richer? ! What (in purely economic terms) causes economies to ! We need to model economic growth ! Lets make some assumptions about our model 6 2008 Arnav Sheth. All rights reserved. grow? 6/30/08 Recap ! We assume two factors of production ! capital ! labor ! We assume both contribute to growth ! We assume labor is augmented by ! technology/organization/ideas ! all lumped into something we call efficiency ! assume that efficiency is multiplicative with labor 6/30/08 7 2008 Arnav Sheth. All rights reserved. Recap 6/30/08 8 2008 Arnav Sheth. All rights reserved. ! Growth differences have roots in two broad areas: ! Labor Efficiency ! Capital Intensity Labor Efficiency (E) Technology Ideas Organization Ideas Capital Intensity Ks contribution to Y- growth K/Y Recap ! We need to create a function that relates: ! Output with ! Labor ! denoted by L ! Capital Stock ! denoted by K ! Efficiency ! denoted by E ! So we write a general form 6/30/08 9 2008 Arnav Sheth. All rights reserved. Recap ! Note that ! is slightly different from ! which is what you saw in class on Thursday ! How did we get from one to the other? 6/30/08 10 2008 Arnav Sheth. All rights reserved. The Cobb-Douglas Production Function ! A function that will allow us to to do that is ! the Cobb-Douglas production function ! Proposed by Charles Cobb and Paul Douglas in 1928 ! said ! = 0.25 gave a good fit ! they did not have any efficiency term ! focused on manufacturing ! Exhibits constant returns to scale ! If all inputs are doubled, production will double...
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Lecture5 - The Theory of Economic Growth continued Chapter...

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