ch6_consolidated - Macroeconomic Theory Economic Growth...

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Macroeconomic Theory Economic Growth Baran Doda Department of Economics University of Toronto Summer 2010 ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Introduction Growth is a much more important phenomenon than business cycles Lucas: “Once you start thinking about growth and development, it is hard to think about anything else.” Growth has allowed real GDP per capita to increase by a factor of 14 between 1870 and 2007 Growth differences have produced enormous differences in standard of living across nations today In this lecture, we study the causes and consequences of economic growth ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions An Example on the Importance of Growth Growth (%) Years 1 2 3 10 1.1 1.2 1.3 30 1.3 1.8 2.4 60 1.8 3.3 5.9 100 2.7 7.2 19.2 Small differences in growth lead to substantial differences in standard of living within a few generations ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Issues We Want to Study Why are some countries so much richer than others? Why are some countries able to produce a take-off in standard of living (miracles) while others fail to do so (disasters)? What are the determinants of productivity and standard of living across nations? Need facts to discipline our study of growth ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Disparity in GDP per worker 1960 1965 1970 1975 1980 1985 1990 1995 10 15 20 25 30 35 40 45 50 55 60 The ratio of GDP per worker for the 5 richest and 5 poorest countries of the world is large (and increasing!). ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Investment and GDP per Worker Rich countries tend to invest more in physical capital. ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Schooling and GDP per Worker Rich countries tend to invest more in human capital. ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Population Growth and GDP per Worker Countries with high population growth rates tend to be poorer. ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions More Facts on Growth Further Readings: Parente and Prescott (1993), "The Changes in the Wealth of Nations", Federal Reserve Bank of Minneapolis Duarte and Restuccia (2006), “The Productivity of Nations", Federal Reserve Bank of Richmond ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Road Map Analyze an environment with no population or labor productivity growth Then add population growth Then add labor productivity growth ECO 208 Macroeconomic Theory
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Growth Facts The Solow Model Growth Accounting Extensions Infinitely-Lived Individuals The time horizon in the Solow model is infinite Population size is constant and equal to N Each consumer has one unit of time per period ( h = 1) Consumers do not care about leisure: they supply their unit of time inelastically to the market Since there are N
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