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ch7amemo - Economics 3307 Key Points of Chapter 7 The...

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Economics 3307 Key Points of Chapter 7 The purpose of this chapter and Chapter 8 is to explain the following basic facts about economic growth: 1. Real output per person grows at a more or less constant rate over fairly long periods of time. 2. The stock of real capital grows at a more or less constant rate exceeding the growth of labor input. 3. The rates of growth of real output and the stock of real capital tend to be about the same, so that the ratio of real capital to real output (K/Y) has no pronounced long-term trend. Point (1) is the main source of ongoing increases in the "standard of living" observed in the last 100-200 years in industrialized market economies. If we can develop an explanation of (1) that also implies (2) and (3), then we can have some confidence that the explanation is correct -- or at least that is captures some element of the "truth" about economic growth. The Solow model with ongoing population growth and technological progress (which is covered in Chapter 5) can explain fact (1) in a way that is consistent with facts (2)-(3). We must have ongoing population growth and technological progress because: - The Solow Model without population growth and without technological progress (which is covered in Chapter 4) predicts that real output is constant over time. In fact, real output rises about 3% per year in the U.S. - The Solow Model with population growth and without technological progress (also in Chapter 4) predicts that real output should rise over time, but that real output per person is constant over time. In fact, real output per person rises about 2% per year in the U.S.
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This note was uploaded on 04/30/2008 for the course ECO 3307 taught by Professor Green during the Spring '08 term at Baylor.

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ch7amemo - Economics 3307 Key Points of Chapter 7 The...

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