Chapter8

# Chapter8 - Inthischapter,youwilllearn how to incorporate...

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slide 1 CHAPTER 8 Economic Growth II In this chapter, you will learn… 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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slide 2 CHAPTER 8 Economic Growth II 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: 1904-2004: U.S. real GDP per person grew by a factor of 7.6, or 2% per year. examples of technological progress abound (see next slide).
slide 3 CHAPTER 8 Economic Growth II 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. Not capable of playing episodes of Grey’s Anatomy . 2006: iPod capacity = 80gb, 20,000 songs. Can play episodes of Grey’s Anatomy .

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slide 4 CHAPTER 8 Economic Growth II 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 =
slide 5 CHAPTER 8 Economic Growth II 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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slide 6 CHAPTER 8 Economic Growth II 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 )
slide 7 CHAPTER 8 Economic Growth II Technological progress in the  Solow model ( δ + n + g ) k = break-even investment: the amount of investment necessary to keep k constant. Consists of: 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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slide 8 CHAPTER 8 Economic Growth II 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 )     -   (   + + g ) k
CHAPTER 8 Economic Growth II 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

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## This document was uploaded on 10/28/2011 for the course ECON 420 at UNC.

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Chapter8 - Inthischapter,youwilllearn how to incorporate...

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