S10 MyCh06-1

# S10 MyCh06-1 - Ch 6 Long-run Economic Growth Motivation...

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Ch. 6 Long-run Economic Growth Motivation Source for growth The Solow Model Policy to raise living standards 1

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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 (2-6 yrs.) Presently attention shifts to another dimension, the third: 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 ‘ game-changing ’ 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

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Table 6.1 Economic Growth in Eight Major Countries, 1870–2005 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

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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,

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S10 MyCh06-1 - Ch 6 Long-run Economic Growth Motivation...

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