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Gordon_Answers11e_ch10

Gordon_Answers11e_ch10 - 108 Gordon Macroeconomics Eleventh...

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108 Gordon • Macroeconomics, Eleventh Edition In Section 10-4, discussion in the subsection “Solow’s Insight” has been modified significantly. Explanation about the Figure 10-4 has been supplemented with the situation where changes can occur in the population growth or in the deprecation rate, in addition to a change in the saving rate. There are no other changes in this chapter from the 10th edition. Answers to Questions in Textbook 1. The great question of economic growth is why is there such a great and growing gap between the standards of living in rich and poor nations. In the context of that question, when we consider a country as being rich or poor, we ask how well off is the average person in the country, not how much is produced in the country. To make this clear, consider Country A, which has a total output that is twice as large as that of Country B, but has a population that is 20 times greater than Country B. Note the average income of a person in Country B is 10 times greater than that of a person in Country A. Therefore, the average person in Country B is much better off than the average person in Country A, even though the total output of Country A exceeds that of Country B. The second important question is why economic growth varies over time. If that variation is simply due to rises and falls in population growth as opposed to how quickly output per person is rising, very few people will care because the increase in the average standard of living has not changed. On the other hand, when there is a slowdown or speedup in output per person, as happened during the periods 1973–95 and 1995–2005, respectively, then those changes and why they occur become topics of great interest not only to economists, but also to policymakers and the general public as well. Therefore, the two great questions of economic growth require theories to explain what causes output per person, as opposed to total output, to grow over time. 2. If the production function has constant returns to scale, real GDP will double when labor and capital inputs double; because output and inputs all double, capital per person, the ratio of output to capital, and output per person do not change. When capital and labor inputs double and the autonomous growth factor also doubles, however, real GDP increases fourfold. In this situation, there is still no change in capital per person, but now the output-capital ratio and output per person both double. 3. In the steady state, output, capital input, and labor input grow at identical rates, so that capital per person and output per person remain constant. In Solow’s model, the economy automatically adjusts toward steady state capital per person ( K / N ) and output per person ( Y / N ). These adjustments occur when the level of saving and investment per person do not equal the level of steady-state investment per person needed to replace old capital and to provide new capital sufficient to keep K / N constant as the labor force grows. The higher is K / N , the greater is the required steady-state investment. Whether
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