2020 lesson 8 post

2020 lesson 8 post - Long Run Growth (The Solow Growth...

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Long Run Growth (The Solow Growth Model and Extensions) This section is far less wordy and far more technical than other sections, so we will do nearly all of the notes on the board. The general outline of material is as follows: I. Capital Accumulation II. The Steady State III. The Role of Savings IV. Different Steady States and the Golden Rule Steady State\ V. Population Growth VI. Technological Progress All of these are summarized below: A fact in developed countries is that output grows over time. This growth is irregular and is sometimes interrupted by recessions, but the overall trend is upward. Real GDP in the US has tripled over the last 40 years, and is 40 times larger than in 1874. Looking across countries, we also see very different standards of living. Traditionally, Macroeconomics analyzes the behavior of output in terms of both: (1) Its overall upward trend – the long run. (2) Fluctuations around the trend – the short run. This dynamic economic growth model that we will study (the “Solow Growth Model”) shows how the growth of output is affected by (1) savings (2) population growth (3) technological progress The Accumulation of Capital The Production Side Y = F(K, L) Labor (L)—the time people spend working Capital (K)—the set of tools that workers use. F( )—the production function reflects the available technology for turning inputs to output.
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The production function shows three possible sources of long-run output growth. (1) Capital stock (K) may increase over time. (2) Labor employed (L) may change over time (as population changes). (3) The production function itself may change (technological progress). The most basic model has: (1) No population growth (i.e. no labor force growth) L (2) No technological growth, i.e., fixed F( ). (3) Constant Return to Scale (CRS) of the production function. Assuming this implies the size of the economy does not change the relationship between output per worker and capital per worker. Double your inputs and you will double the output!
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2020 lesson 8 post - Long Run Growth (The Solow Growth...

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