lec25slides - GROWTH Most of our economic well-being has...

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1 GROWTH Most of our economic well-being has come from growth. 2 Real GDP in 2000 dollars: 1929-2008 0 2,000 4,000 6,000 8,000 10,000 12,000 1925 1935 1945 1955 1965 1975 1985 1995 2005
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3 Growth comes from: More capital Larger labor supply Increased productivity 4 How much can our economy grow? What is the optimal investment level?
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5 Assume no growth in: Labor supply Productivity 6 Y increases with K at a decreasing rate. $ K Y
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7 Each year we invest some share of output. $ K I = sY Y 8 Question: Does our investment increase output indefinitely? Will our economy grow forever?
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9 Each year there is loss of capital. Depreciation rate is λ . $ K λ K Y 10 Compare investment with depreciation. $ K λ K I = sY Y
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11 With low K: Investment exceeds depreciation K and Y grows: $ K λ K I = sY Y K 1 12 With high K: Depreciation exceeds investment K and Y decrease: $ K λ K I = sY Y K 2
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13 Steady State: Equilibrium Capital $ K λ K K* I = sY Y 14 Implication: In steady-state, there is no growth. Economy grows to reach steady-state and then quits growing.
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15 Impact of higher share of Y invested.
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This note was uploaded on 11/28/2010 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec25slides - GROWTH Most of our economic well-being has...

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