LN_ch4 - Chapter 4 1 Final Lecture Notes Chapter 4 The...

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Chapter 4 1 Final Lecture Notes: Chapter 4: The Theory of Economic Growth J. Bradford DeLong http://econ161.berkeley.edu/ [email protected] Background Ultimately long-run growth is the most important aspect of how the economy performs. Material standards of living and levels of economic productivity in the United States today are about four times what they are today in, say, Mexico—and five or so times what they were at the end of the nineteenth century—because of rapid, sustained long-run economic growth. Good and bad policies can accelerate or cripple this growth. Argentines were richer than Swedes before World War I, but Swedes today have four times the standard of living and the productivity level of Argentines. Almost all of this difference is due to differences in growth policies working through two channels. The first is the impact of policies on the economy’s technology that multiplies the efficiency of labor. The second is their impact on the economy’s capital intensity —the stock of machines, equipment, and buildings. In this growth section, Chapter 5 analyzes the facts of economic growth. Chapter 4 focuses on the theory. Its aim is to build up the growth model that economists use to analyze how much growth is generated by the advance of technology and how much by investment to boost capital intensity on the other. Better Technology The bulk of the reason that Americans today are more productive than their predecessors of a century ago is better technology. We now know how to make electric motors, dope semiconductors, transmit signals over fiber optics, fly jet airplanes, machine internal combustion engines, build tall and durable structures out of concrete and steel, record entertainment programs on magnetic tape, make hybrid seeds, fertilize crops with nutrients, organize assembly lines, and a host of other things our predecessors did not know how to do. Better technology leads to a higher efficiency of labor --the skills and education of the labor force, the ability of the labor force to handle modern machine
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Chapter 4 2 Final technologies, and the efficiency with which the economy's businesses and markets function. Capital Intensity However, a large part is also played by the second factor: capital intensity . The more capital the average worker has at his or her disposal to amplify productivity, the more prosperous the economy will be. In turn, there are two principal determinants of capital intensity. The first is the investment effort made by the economy: the share of total production--real GDP-- saved and invested to boost the capital stock. The second are the economy’s investment requirements : how much new investment is needed to simply equip new workers with the standard level of capital, to keep up with new technology, and to replace worn- machines and buildings. The ratio between the investment effort and the investment requirements of the economy
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LN_ch4 - Chapter 4 1 Final Lecture Notes Chapter 4 The...

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