ECON 305 paper EX - Question 1: Verbally and graphically...

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Question 1: Verbally and graphically explain why productivity is the only source of sustainable economic growth. According to the Solow growth model, increasing savings and investment per worker only increases growth until a steady state is reached. The only way to sustain growth without limits in the long run is to increase factor productivity. This is most often caused by technological progress and effects the production function in the following way. Originally we have: Y = F ( K, L ) With the addition of new technology that makes labor more productive we have: Y = F ( K, L x E). Where E is the variable that represents the efficiency in labor. The increase in technology changes the position of the Golden Rule ratio. The increased consumption per worker pushes the position outward and increases overall output. If the economy reaches a steady state, where savings per worker equals investment per worker, output can be maximized and further economic growth will be possible.
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This note was uploaded on 01/29/2012 for the course ECONOMICS 300 taught by Professor Instructor during the Fall '11 term at Boise State.

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ECON 305 paper EX - Question 1: Verbally and graphically...

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