Lecture 7

# Lecture 7 - ECONOMICS 100B Professor Steven Wood 02/08/11...

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ECONOMICS 100B Professor Steven Wood 02/08/11 Lecture 7 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Today’s lecture focuses on Chapter 6 Part 1 and examines the Solow Growth Model. LONG-TERM ECONOMIC GROWTH: Long-term economic growth is the annual average growth rate of real economic output over a period of 10 years or longer. Economic output is generally measured in or per-worker terms. From 1500 BCE to 1700, there was little change in per-worker standard of living. Since 1750, economic output per person has dramatically increased. Therefore, when we speak about long- term economic growth, we are only talking about a span of about 200 years. Relatively small changes in growth rate can generate huge differences in output over long periods of time. This is the effect of compounding. The Rule of 72 approximates how long it takes for an economy to double in size for different growth rates. Divide 72 by the country’s average annual growth rate, and the result is the number of years it takes to double the economy. For example, China’s growth rate has been 10%, so it will take 72/10 = 7.2 years for the economy to double. Recall the production function Y = AF(K, L). We can translate this to the growth accounting formula: Δ Y/Y = Δ A/A + α K Δ K/K + α L Δ L/L where: 1.) αK is output elasticity respective of K, 2.) αL is output elasticity respective of L 3.) αK + αL = 1. For the United States, since Y = AK 0.3 L 0.7 , Δ Y/Y = Δ A/A + 0.3 Δ K/K + 0.7 Δ L/L Alternatively, we can represent the same formula this way: g Y = g A + 0.3g K + 0.7g L where: 1. g Y = growth rate of economic output (Y) 2. g A = growth rate of total factor productivity (A) 3. g K = growth rate of capital stock (K) 4. g L = growth rate of the labor force (L) According to this formula, a 10% rise in A raises

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## This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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Lecture 7 - ECONOMICS 100B Professor Steven Wood 02/08/11...

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