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sch7 - Inthischapter,youwilllearn...

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In this chapter, you will learn: In this chapter, you will learn: the closed economy Solow model how a country’s standard of living depends on its saving and population growth rates how to use the “Golden Rule” to find the optimal saving rate and capital stock
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2 CHAPTER 7 Economic Growth I Why growth matters Data on infant mortality rates: 20% in the poorest 1/5 of all countries 0.4% in the richest 1/5 In Pakistan, 85% of people live on less than $2/day. One-fourth of the poorest countries have had famines during the past 3 decades. Poverty is associated with oppression of women and minorities. Economic growth raises living standards and reduces poverty….
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Income and poverty in the world  selected countries, 2000 0 10 20 30 40 50 60 70 80 90 100 $0 $5,000 $10,000 $15,000 $20,000 %o fp o p u la t io n l iv in go n$2p e rd ayo r les Income per capita in dollars Madagascar India Bangladesh Nepal Botswana Mexico Chile S. Korea Brazil Russian Federation Thailand Peru China Kenya
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4 CHAPTER 7 Economic Growth I Why growth matters Anything that effects the long-run rate of economic growth – even by a tiny amount – will have huge effects on living standards in the long run. 1,081.4% 243.7% 85.4% 624.5% 169.2% 64.0% 2.5% 2.0% …100 years …50 years …25 years percentage increase in standard of living after… annual growth rate of income per capita
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5 CHAPTER 7 Economic Growth I Why growth matters If the annual growth rate of U.S. real GDP per capita had been just one-tenth of one percent higher during the 1990s, the U.S. would have generated an additional $496 billion of income during that decade.
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6 CHAPTER 7 Economic Growth I The lessons of growth theory …can make a positive difference in the lives of hundreds of millions of people. These lessons help us understand why poor countries are poor design policies that can help them grow learn how our own growth rate is affected by shocks and our government’s policies
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7 CHAPTER 7 Economic Growth I The Solow Model Building block model for growth theory Long-run growth model Simplifying assumption -> Intuition
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8 CHAPTER 7 Economic Growth I The Solow model due to Robert Solow, won Nobel Prize for contributions to the study of economic growth a major paradigm: widely used in policy making benchmark against which most recent growth theories are compared looks at the determinants of economic growth and the standard of living in the long run
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9 CHAPTER 7 Economic Growth I Ch3’ model (review) Supply side Y = F(K,L) and Output is determined So
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10 CHAPTER 7 Economic Growth I   Real GDP is fixed 
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11 CHAPTER 7 Economic Growth I  Demand Side Y = C + I + G C = I = G , T = , so consumption is also By the consumption equation.
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12 CHAPTER 7 Economic Growth I Ch 3 model Aggregate demand: Aggregate supply: Equilibrium: The real interest rate adjusts to equate demand with supply.
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13 CHAPTER 7 Economic Growth I How Solow model is different from  Chapter 3’s model 1.
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