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Unformatted text preview: 1 71 The Source of Growth and the Solow Model Part 1 72 Agenda 1. The Importance of LongTerm Growth 2. The Sources of Economic Growth 3. The Solow Growth Model 73 The Importance of LongTerm Growth Longterm economic growth is about the annual average growth rate of real economic output, generally over period of 10 years or longer. Because of changes in the size of a countrys population and labor force, economic output is generally measured in percapita or per worker terms . 74 The Importance of LongTerm Growth Y/L 1,500BCE 0 500CE 1000 1500 1750 2000 http://www.youtube.com/watch?v=jbkSRLYSojo 2 75 The Importance of LongTerm Growth Small changes in growth rates make very large differences over long periods of time. The Rule of 72 gives an approximation for how long it takes for an economy to double in size for various growth rates. To calculate, divide 72 by the countrys average annual growth rate. The result is the number of years it takes to double the economy. 76 The Importance of LongTerm Growth 77 The Sources of Economic Growth The economys production function is: Y = AF ( K , L ) where: 1. Y = economic output, 2. K = the capital stock, 3. L = the labor force, and 4. A = total factor productivity. 78 The Sources of Economic Growth The growth accounting formula is: Y/Y = A/A + K K/K + L L/L where: 1. K is the output elasticity with respect to K, 2. L is the output elasticity with respect to L, and 3. K + L = 1. 3 79 The Sources of Economic Growth More specifically for the U.S.: Y = AK 0.3 L 0.7 and Y/Y = A/A + 0.3 K/K + 0.7 L/L 710 The Sources of Economic Growth Using alternative notation: g Y = g A + 0.3g K + 0.7g L where: 1. g Y = growth rate of Y, economic output....
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 Fall '08
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