Ch_8 - LectureNoteChapter8 EconomicGrowthII...

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1 CHAPTER 8 Economic Growth II Lecture Note-Chapter 8 Economic Growth II:  Technology, Empirics &  Policy University of Waterloo Department of Economics Spring 2010
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2 CHAPTER 8 Economic Growth II  Introduction The Solow growth model as developed in Chapter 7 showed how changes in the capital stock and population growth affect the long-run level of output of the economy. This chapter adds changes in technology to complete the model. The complete Solow growth model can then be used to examine how public policies influence saving and investment and thus affect long-run economic growth.
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3 CHAPTER 8 Economic Growth II  Introduction While the Solow model is a useful tool for understanding economic growth, it is not without its weaknesses. Macroeconomists have attempted to address some of these weaknesses to better understand the process of economic growth.
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In this chapter, you will learn: In this chapter, you will learn: how to incorporate technological progress in the Solow model. about policies to promote growth. about growth empirics: confronting the theory with facts. two simple models in which the rate of technological progress is endogenous.
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5 CHAPTER 8 Economic Growth II Introduction In the Solow model of Chapter 7, the production technology is held constant. income per capita is constant in the steady state. Neither point is true in the real world: 1908-2008: U.S. real GDP per person grew by a factor of 7.8, or 2.05% per year. examples of technological progress abound (see next slide).
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6 CHAPTER 8 Economic Growth II Examples of technological progress From 1950 to 2000, U.S. farm sector productivity nearly tripled. The real price of computer power has fallen an average of 30% per year over the past three decades. Percentage of U.S. households with 1 computers: 8% in 1984, 62% in 2003 1981: 213 computers connected to the Internet 2000: 60 million computers connected to the Internet 2001: iPod capacity = 5gb, 1000 songs. Not capable of playing episodes of True Blood . 2009: iPod capacity = 120gb, 30,000 songs. Can play episodes of True Blood .
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7 CHAPTER 8 Economic Growth II Technological progress in the Solow  model Chapter 7 provided an explanation of persistently rising output, but we have not yet explained rising living standards. To do so, we incorporate technological progress, meaning that we are able to produce more output with a given amount of capital and labor.
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8 CHAPTER 8 Economic Growth II  Technological progress Workers and machines cannot produce anything without a formula or a blueprint that shows them how to do it. This blueprint is what we call knowledge or technology. Technology level is denoted by A (non rival in nature). Two or more producers can use the knowledge or blueprint at the same time.
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9 CHAPTER 8 Economic Growth II  The neoclassical production functions We consider neoclassical production functions: Y=F(K,AL)-Labour augmenting or Harrod-neutral or Y=AF(K,L)-Hicks-neutral or, Y=F(AK,L)-Capital augmenting or Solow neutral
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