09+The+Solow+Model%2C+Part+3

09+The+Solow+Model%2C+Part+3 - Agenda 1. Productivity...

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1 9-1 The Solow Model, Part 3 & Drivers of Growth— Technology, Part 1 9-2 Agenda 1. Productivity Change in the Solow Model 2. Technology as a Production Input 3. Endogenous Growth Theory 9-3 Productivity Change in the Solow Model Suppose that: 1. The economy is at its steady-state, and 2. That the level of productivity, A, then increases. 9-4 “S” Productivity Change in the Solow Model K/L Y/L I/L = s 0 *A*f(K/L) I B /L = ( δ 0 + g L0 )K/L Y/L = A*f(K/L) (Y/L) S (I/L) S = (I B /L) S (K/L) S
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2 9-5 Productivity Change in the Solow Model An improvement in productivity has two favorable effects: 1. Productivity gains directly improve the amount that can be produced at any capital-labor ratio. 2. Productivity gains also increases national saving and indirectly cause the long-run capital-labor ratio to rise. 9-6 Productivity Change in the Solow Model What is the adjustment mechanism that moves the economy to its new steady-state? 1. An increase in productivity, A, rotates both the per-worker production and the per-worker investment functions up. 2. At the original K/L at (K/L) S , Y/L is now higher. 3. Also at the original K/L at (K/L) S , I/L > I B /L. 9-7 Productivity Change in the Solow Model What is the adjustment mechanism that moves the economy to its new steady-state? 4. As K/L increases: a. Y/L increases along the new production function, b. I/L increases along the new investment function, and c. I B /L increases along the balanced investment function. 9-8 Productivity Change in the Solow Model What is the adjustment mechanism that moves the economy to its new steady-state? 5. Because of diminishing marginal product of capital, the increase in I/L is smaller than the increase in I B /L for every increase in K/L. 6. Eventually I/L will equal I B /L at a new, higher steady state at S 1 .
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3 9-9 Productivity Change in the Solow Model How fast is the economy growing: 1. At the initial steady state , S? g Y = g L0 = g K 2. At the new steady state, S 1 ? g Y = g L0 = g K 9-10 Productivity Change in the Solow Model How fast is the economy growing: 3. During the transition period between S and S 1 ? a. Because Y/L is increasing g Y > g L0 , and b. Because K/L is increasing g K > g L0 . 9-11 Productivity Change in the Solow Model A increase in productivity, A, results in: 1. A higher capital-labor ratio, K/L , 2. Higher output per worker, Y/L , 3. Faster growth during the transition period, but 4. No change in long-term economic growth rate. 9-12 Productivity Change in the Solow Model Can income-per-worker grow forever?
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09+The+Solow+Model%2C+Part+3 - Agenda 1. Productivity...

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