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mankiw7e-chap08 - Chapter 8 Economic Growth II Technology...

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Chapter 8: Economic Growth II: Technology, Empirics, and Policy how to incorporate technological progress in the Solow model about policies to promote growth about growth empirics: confronting the theory with facts two simple models in which the rate of technological progress is endogenous
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Introduction In the Solow model of Chapter 7, the production technology is held constant. income per capita is constant in the steady state. Neither point is true in the real world: 1908-2008: U.S. real GDP per person grew by a factor of 7.8, or 2.05% per year. examples of technological progress abound (see next slide).
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Examples of technological progress From 1950 to 2000, U.S. farm sector productivity nearly tripled. The real price of computer power has fallen an average of 30% per year over the past three decades. Percentage of U.S. households with 1 computers: 8% in 1984, 62% in 2003 1981: 213 computers connected to the Internet 2000: 60 million computers connected to the Internet 2001: iPod capacity = 5gb, 1000 songs. 2009: iPod capacity = 120gb, 30,000 songs.
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Technological progress in the Solow  model A new variable: E = labor efficiency Assume: Technological progress is labor-augmenting : it increases labor efficiency at the exogenous rate g : E g E =
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Technological progress in the Solow  model We now write the production function as: where L × E = the number of effective workers. Increases in labor efficiency have the same effect on output as increases in the labor force. ( , ) Y F K L E = ×
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Technological progress in the Solow  model Notation: y = Y/LE = output per effective worker k = K/LE = capital per effective worker Production function per effective worker: y = f ( k ) Saving and investment per effective worker: s y = s f ( k )
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Technological progress in the Solow  model ( δ + n + g ) k = break-even investment: the amount of investment necessary to keep k constant. Consists of: δ k to replace depreciating capital n k to provide capital for new workers g k to provide capital for the new “effective” workers created by technological progress
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Technological progress in the Solow  model Investment, break-even investment Capital per worker, k   sf(k) ( δ   + n   + g   )   k k *   k     =   s f ( k )     -   ( δ   + + g ) k
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Steady-state growth rates in the  Solow model with tech. progress n + g Y = y × E × L Total output g ( Y / L ) = y × E Output per worker 0 y = Y / ( L × E ) Output per effective worker 0 k = K / ( L × E ) Capital per effective worker
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The Golden Rule with technological  progress To find the Golden Rule capital stock, express c * in terms of k * : c * = y * - i * = f ( k * ) - ( δ + n + g ) k * c * is maximized when MPK = δ + n + g or equivalently, MPK - δ = n + g In the Golden Rule steady state, the marginal product of capital net of depreciation equals the pop. growth rate plus the rate of tech progress.
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Growth empirics:  Balanced growth Solow model’s steady state exhibits balanced growth - many variables grow at the same rate.
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