lecture8 - ECONOMICS 100B Professor Steven Wood Lecture 8...

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Unformatted text preview: ECONOMICS 100B Professor Steven Wood 2/11/10 Lecture 8 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Problem Set #2 has been posted to bSpace. You should be able to do half of it. I have posted an old exam from spring of 2008. You will notice that my exam looks exactly like the problem sets. Exam number one has been pushed back to Tuesday, February 23 rd . It will not include the lecture from the prior Thursday titled Business Cycle Fluctuations. Washington DC has been shut down for most of the week. In fact, Bernanke’s testimony did not take place. Headlines were not significantly different. Bernanke’s important point was not how but when the Fed Reserve will tighten interest rates. Greece is one of the few countries in the world that has a larger deficit than its GDP. The Greek government admitted that they lied about their budget numbers and that the actual numbers are worse than anticipated. When we look at the Greek economy, we will find that there is a price and a cash price. Because credit card statements leave paper trail that government can follow, the consumer can get a cheaper price by paying in cash rather than by credit card. It turns out that about 25% of the Greek economy is underground due to cash tax avoidance. The US’s underground economy is about 7% of the economy. The world’s largest underground economy is Columbia, which has an underground economy equivalent to 125% of its GDP. LECTURE Today we will talk about the sources of economic growth and look at specific dynamics of how an economy grows. The particular model we are trying to develop today is called the Solow Growth Model. From this data, we can see that growth rates can vary quite significantly between countries over a long period of time. If you look at growth rates from 1870-2005, what you see is that Australia and UK had growth rates of 1.4%, Japan had a growth rate of 2.5%, and US had a growth rate of 1.9%. These differences may not sound like much, but let’s take a look at Australia’s economy in 1870. Based on real GDP per capital, Australia was the richest country in the world in 1870. In subsequent years, its GDP only grew at 1.4%. Japan was really poor in 1870, but by growing its GDP at 2.5%, it has greatly closed the gap between Australia and itself. The point here is that small changes in growth rates over long period of time can make substantial differences in the level of income per capita. One of the things we would like to see is faster growth rate of income per capita. While this is not a very relevant issue for US, it is a crucial one...
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This note was uploaded on 02/16/2010 for the course ECON 100B taught by Professor Wood during the Spring '08 term at Berkeley.

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lecture8 - ECONOMICS 100B Professor Steven Wood Lecture 8...

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