S10 MyCh06

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

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Unformatted text preview: Ch. 6 Long-run Economic Growth • Motivation • 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 cur r ent instant B . As part of wealth, which influences saving and investment in studying cyclical fluctuations in the shor t r un (2-6 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 ‘ 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 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 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)...
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This note was uploaded on 06/01/2010 for the course ECON 3140 at Cornell.

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

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