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Unformatted text preview: 4 G ROWTH AND P OLICY FOCUS OF THE CHAPTER • In the last chapter, we learned that the rate of growth of potential output is determined by the rate of population growth, by changes in the level of natural resources, and by improvements in technology. In this chapter, we recognize that society’s choices affect these parameters. • The first part of this chapter investigates the forces that bring about technological change, focusing in particular on the new ideas generated by the process of capital investment, and the fact that it is difficult, if not impossible, for any individual firm to capture all the benefits of these ideas. It also looks more carefully at convergence the question of whether economies with different levels of income will eventually achieve the same standard of living. • The second part of this chapter looks at problems of population growth and development. Using examples from high growth and low growth countries, this section examines the role of prudent policy in influencing the growth rate of a country. SECTION SUMMARIES 1. Growth Theory: Endogenous Growth Endogenous growth theory does something fairly radical it uses a production function with increasing returns to scale . It is able to do this by assuming that there are external benefits associated with private investment, so that an individual firm does not reap all of the benefits from its own investment. New knowledge, inventions, and discoveries are a by-product of some kinds of investment, and all of these benefit society as well. Thus it turns out that capital can have a diminishing marginal product in the eyes of individual producers, but because of these external benefits, a constant marginal product in the eyes of society. This tiny modification makes a world of difference. It was capital’s diminishing marginal product that gave us a savings curve with a declining slope, and it was this savings curve with the declining slope that guaranteed that the investment requirement line and the savings line 36 37 C HAPTER 4 would eventually intersect, so that there would be a steady-state. When we allow capital to have a constant marginal product, the savings curve becomes a straight line. There is no steady-state. When the savings curve is everywhere above the investment requirement line, as in Figure 4- 2, we get ongoing growth. When it is everywhere below the investment requirement line (not shown), output and the capital stock eventually fall to...
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This note was uploaded on 12/02/2011 for the course ECON 209 taught by Professor Dr.martin during the Spring '09 term at Charleston.
- Spring '09