This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 1 91 LongRun Economic Growth, Part 2 92 Agenda • Fundamental Determinants of Living Standards. • Policies to Raise LongRun Living Standards. 93 The Solow Model • Fundamental determinants of living standards: ¾ The saving rate. ¾ Population growth. ¾ Productivity growth. 94 The Solow Model • Fundamental determinants of living standards: ¾ Increasing the saving rate: 2 95 A Effect of an increase in the saving rate K/N Y/N S/N = s*A *f( K/N ) I b /N = (n + d)K/N Y/N = A *f( K/N ) (Y/N) A (S/N) A = (I b /N) A (K/N) A 96 The Solow Model • The adjustment mechanism: ¾ A higher saving rate shifts the saving function up. ¾ At the original K/N , at (K/N) A , S/N is now greater than I b /N . ¾ Consequently, K/N will increase, causing: • Y/N to increase along the production function, • S/N to increase along the new saving function, and • I b /N to increase along the balanced investment function. 97 The Solow Model • The adjustment mechanism (continued): ¾ Because of diminishing marginal product of capital, the increase in S/N is smaller than the increase in I b /N for every increase in K/N . ¾ Eventually S/N will equal I b /N at a new, higher steady state at B. 98 The Solow Model • The adjustment mechanism (continued): ¾ At B, Y/N has increased, K/N has increased, S/N has increased, and I b /N has increased. ¾ At steady state B, Δ Y/Y = Δ N/N = Δ K/K . ¾ During the transition period from steady state A to steady state B: • Δ Y/Y > Δ N/N because Y/N was increasing, and • Δ K/K > Δ N/N because K/N was increasing. 3 99 The Solow Model • Fundamental determinants of living standards: ¾ Increasing the saving rate means: • A higher capitallabor ratio, K/N , • A higher output per worker, Y/N , and • A higher consumption per worker, C/N . 910 The Solow Model • Fundamental determinants of living standards: ¾ Increasing the saving rate: • Should raising the saving rate be a policy goal? – Not necessarily. » There is a tradeoff between present and future consumption. » The cost is lower consumption in the short run. 911 The Solow Model • Fundamental determinants of living standards: ¾ Slowing the population growth rate: 912 A Effect of a faster population growth rate K/N Y/N S/N = s*A *f( K/N ) I b /N = (n + d)K/N Y/N = A *f( K/N ) (Y/N) A (S/N) A = (I b /N) A (K/N) A 4 913 The Solow Model • The adjustment mechanism: ¾ A slower population growth rate rotates the balanced investment function down....
View
Full
Document
This note was uploaded on 11/05/2010 for the course ECON 151 taught by Professor Staff during the Summer '08 term at Berkeley.
 Summer '08
 Staff

Click to edit the document details