Chap 03_Delong

Chap 03_Delong - CHAPTER 3 The Theory of Economic Growth...

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3-1 CHAPTER 3 The Theory of Economic Growth
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3-2 Questions • What are the principal determinants of long-run economic growth? • What equilibrium condition is useful in analyzing long-run growth? • How quickly does an economy head for its steady-state growth path?
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3-3 Questions • What effect does faster population growth have on long-run growth? • What effect does a higher savings rate have on long-run growth? • What government policies can enhance growth?
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3-4 Long-Run Economic Growth... • is the most important aspect of how the economy performs • can be accelerated by good economic policies • can be retarded by bad economic policies
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3-5 Long-Run Economic Growth • Policies and initial conditions affect growth through two channels –their impact on the level of technology •multiplies the efficiency of labour –their impact on the capital intensity of the economy •the stock of machines, equipment, and buildings that the average worker has at his or her disposal
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3-6 Technology • leads to a higher efficiency of labour – skills and education of the labour force – ability of the labour force to handle modern machines – the efficiency with which the economy’s businesses and markets function • Economists are good at analyzing the consequences of better technology – have less to say about the sources
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3-7 Capital Intensity • There is a direct relationship between capital-intensity and productivity • Two principal determinants –investment effort •the share of total production saved and invested in order to increase the capital stock –investment requirements •how much of new investment is used to equip new workers with the standard level of capital or to replace worn-out or obsolete capital
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3-8 Growth Accounting • In 1956 Robert Solow developed a general framework for measuring the contributions of factors of production to the growth of output. • Solow proposed using a neoclassical production function for growth accounting. –The production function tells us how much the economy can produce given the economy’s resources and the level of technology
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3-9 Growth Accounting • Neoclassical production function: • Cobb-Douglas production function where α measures the share of total income earned by capital, while 1 α measures the share of total income earned by labour. ) L , K ( F A Y t t t t × = α α × × = 1 t t t L K A Y t (3.1) (3.2)
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3-10 Growth Accounting • From the Cobb-Douglas production function we obtain • The Solow residual for calculating multi- factor productivity is obtained from this t L L ) 1 ( K K Y Y A A t t t t t t t Δ × α Δ × α Δ = Δ t t t t t t t A A L L ) 1 ( K K Y Y t Δ + Δ × α + Δ × α = Δ (3.3) (3.4)
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3-11 Table 3.1 Average Annual Rates of Growth of Output and Contributions by Type of Input
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3-12 Figure 3.1 Multi-Factor Growth for OECD Countries in 1980s and 1990s
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3-13 Growth Accounting As seen from Figure 3.1, the rate of growth of multi-factor productivity in Canada during the 1980s was lower than its 1.2% average for the
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