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Unformatted text preview: Ch. 6 Longrun Economic Growth Motivatrion Source for growth The Solow Model Policy to raise living standards 1 Motivation So far capital has been discussed in two different contexts A . As factor of production, which determines the output for the current instant B . As part of wealth, which influences saving and investment in studying cyclical fluctuations in the short run (26 yrs.) 2 Long term issues are important, in two contexts even if in the textbook, it is only the focus for the current chapter. First, last chapter places the national economy in a global context. Time may bring gamechanging impact, in the long term, as the pace for growth varies among the nations over time. Colonial America was simply a source for naval supplies; 3 Table 6.1 Economic Growth in Eight Major Countries, 18702005 Low FAS T SLO W High The Sources of Economic Growth Production function Y = AF ( K , N ) (6.1) For decomposition, take total differentiation dY = F dA + A [( F/ K)dK + ( F/ N)dN]. Dividing by (6.1) (dY)/Y = (dA)/A +[(K/F)( F/ K)(dK/K)+(N/F) ( F/ N)(dN/N)] This becomes an equation in growth rate form: Y / Y = A / A + a K K / K + a N N / N (6.2) a K = the elasticity of output with respect to capital a N = the elasticity of output with respect to labor 6 Interpretation A rise of 10% in A raises output by 10% A rise of 10% in K raises output by a K times 10% A rise of 10% in N raises output by a N times 10% Both a K and a N are less than 1 due to diminishing marginal productivity Growth accounting in four steps Breaking output growth into its causes (productivity growth, capital input growth, labor input growth) 1.1....
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 Spring '07
 MBIEKOP
 Macroeconomics, per capita, gr owt, pr oduct ivit

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