Tutorial_CHAP08

Tutorial_CHAP08 - CHAPTER 8 Economic Growth II A PowerPoint...

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1 Chapter Eight ® CHAPTER 8 Economic Growth II A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian

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2 Chapter Eight The Solow model does not explain technological progress but, instead, takes it as given and shows how it interacts with other variables in the process of economic growth.
3 Chapter Eight To examine how a nation’s public policies can influence the level and growth of the citizens’ standard of living, we must ask five questions. 1) Should our society save more or less? 2) How can policy influence the rate of saving? 3) Are there some types of investment that policy should encourage? 4) What institutions ensure that the economy’s resources are put to their best use? 5) How can policy increase the rate of technological progress? The Solow model provides the theoretical framework within which we consider these issues.

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4 Chapter Eight To incorporate technological progress, the Production Function is now written as: Y = F (K, L × E ) The term L E measures the number of workers. This takes into account the number of workers L and the efficiency of each worker, E . It states that total output Y depends on capital K and workers L E . The essence of this model is that increases in E (efficiency) are analogous to increases in L (number of workers). In other words, a single worker (if twice as productive) can be thought of as two workers. L E doubles and the economy benefits from the increased production of goods and services.
5 Chapter Eight Capital per worker, k k * The Steady State Investment, sf ( k ) (δ + n + g) k Technological progress causes E to grow at the rate g , and L grows at rate n so the number of workers L × E is growing at rate n + g . Now, the change in the capital stock per worker is: k = i –( δ+ n + g)k, where i is equal to s f(k). Note: k = K/ L E and y=Y/( L Ε 29. So, y = f(k) is now different. Also, when the g term is added, g k is needed to provided capital to new “effective workers” created by technological progress. sf ( k )

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Chapter Eight Labor-augmenting technological progress at rate g affects the Solow growth model in much the same way as did population growth at rate n. Now that k is defined as the amount of capital per effective worker, increases in the number of effective workers because of technological progress tend to decrease k . In the steady state, investment sf(k) exactly offsets the reductions in k because of depreciation, population growth, and technological progress. Important…
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This note was uploaded on 04/29/2009 for the course ECO 3302 taught by Professor Avdjiev during the Spring '08 term at SMU.

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Tutorial_CHAP08 - CHAPTER 8 Economic Growth II A PowerPoint...

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