9-29-09 - ECONOMICS 100B Professor Martha Olney 9/29/09...

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ECONOMICS 100B Professor Martha Olney 9/29/09 Lecture 10 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS The first midterm will be on Tuesday, October 6. An email was sent out regarding different locations of the exam. LECTURE Outline Long-run final thoughts Determinants of Aggregate Demand o Consumption o Investment o Government Long-Run Growth Final Thoughts When we built our model for long-run growth, we did not include natural resources in our model. I mentioned at the beginning that the production function we are using assumes that there are inputs of capital, labor, and efficiency. We have subsumed under efficiency all factors that affect production other than capital and labor. ܻൌܨሺܭ ,ܮൈܧሻ ܻൌܨ ൬ ܭ ܮ ,ܧ൰ There are many changes we can make to our production function model. What if we allowed an explicit role for natural resources (NR), so that our production function is the following: ܻൌܨሺܭ ,ܴܰ ,ܮכܧሻ ܻ ܮ ൌܨ ܭ ܮ , ܴܰ ܮ ,ܧ൰ We’ve been using the growth model to look at how one economy grows over time. Now let us use our model to compare how two economies grow over time. A change in a variable that is not on our production function will lead to a shift in a curve. If natural resources change, our entire production function will shift. Let us assume we have two economies whose production functions have the same savings rate, labor force growth rate, the depreciation rate, and savings rate. This means that the two economies have the same value of Y/K in the balanced-growth equilibrium and the same BGE line. As we can see from the graph, a country with a low level of natural resources will have a lower level of K/L and Y/L in equilibrium, and thus a lower level of standard of living. A country with a high level of natural resources will have a higher
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Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 9/29/09 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 apply to natural resources. Any variables that can shift our production function will yield the same result. Even if we just use our original model and exclude natural resources, a change in efficiency will lead to a shift in the production function. Now remember that efficiency includes many factors, including financial institutions, the stability of government, transportation systems,
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9-29-09 - ECONOMICS 100B Professor Martha Olney 9/29/09...

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