A reduction in the capital stock will cause which of

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Unformatted text preview: no change in output C) an increase in output per capita D) increase the capital-labor ratio E) none of the above 5. Which of the following must occur to sustain economic growth in the long run? A) technological progress B) capital accumulation C) a higher saving rate D) all of the above 29 Macroeconomics by Yao Amber LI KEY TERMS growth logarithmic scale standard of living output per person purchasing power, purchasing power parity (PPP) convergence Malthusian trap four tigers emerging economies aggregate production function state of technology constant returns to scale decreasing returns to capital decreasing returns to labor capital accumulation technological progress saving rate 30 Sources of Growth Ch11 Saving, Capital Accumulation, and Output (I) Interactions between Output and Capital The Implications of Alternative Saving Rates Getting Sense of Magnitudes Physical versus Human Capital* 31 SAVING, CAPITAL ACCUMULATION, AND OUTPUT The effects of the saving rate - the ratio of saving to GDP – on capital and output per capita are the topics of this chapter. An increase in the saving rate would lead to higher growth for some time, and eventually to a higher standard of living in the United States. Even if the saving rate does not permanently affect the growth rate, it does affect the level of output and the standard of living. (How? – This chapter.) 32 11-1 INTERACTIONS BETWEEN OUTPUT AND CAPITAL At the center of the determination of output in the long run are two relations between output and capital: 1. The amount of capital determines the amount of output being produced. 2. The amount of output determines the amount of saving and, in turn, the amount of capital accumulated over time. 33 11-1 INTERACTIONS BETWEEN OUTPUT AND CAPITAL Figure 11-1 Capital, Output, and Saving/Investment 34 11-1 INTERACTIONS BETWEEN OUTPUT AND CAPITAL The Effects of Capital on Output Under constant returns to scale, we can write the relation between output and capital per worker as follows: Y N F K ,1 N 35 of 26 11-1 INTERACTIONS BETWEEN OUTPUT AND CAPITAL The Effects of Capital on Output Since the focus here is on the role of capital accumulation, we make the following assumptions: The size of the population, the participation rate, and the unemployment rate are all constant. N is constant There is no technological progress. 36 11-1 INTERACTIONS BETWEEN OUTPUT AND CAPITAL The Effects of C...
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