Midterm 2 Study Guide - Growth Accounting

Midterm 2 Study Guide - Growth Accounting - Growth...

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Growth Accounting o informs us about the sources of growth o Y is real GDP o Y = A F (K, L) K is physical capital L is labor A is total factor productivity (TFP) Growth in Labor, L comes from: o Population growth (from all sources) o Increases in labor participation Growth in Capital, K, comes from: o Net investment enabled through saving Growth in TFP, A, comes from: o Innovation o A large list of forces (institutions, markets, culture) Growth Accounting does NOT explain why growth occurs Solow model is our starting point to understand process of growth, it helps us understand: o How long-run standards of living (Y/L) are affected by: Savings rate Capital depreciation rate Population growth rate Growth rate of technological progress o How fast the economy grows over time (how Y, K, L, A grow) Savings represent the part of income that consumers don’t spend immediately o It gets converted to gross investment Depreciated capital gets replaced first
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