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Unformatted text preview: nological externality or knowledge spillover is when improved production processes devised during the process of building capital become part of society’s pool of knowledge. This makes the social returns to capital exceeds the private returns and the benefits of capital accumulation to society are greater than the Solow model suggests. Establishing the right institutions: one reason that nations may have different levels of production efficiency is that they have different institutions that guide the allocation of scarce resources. English- style countries have better developed capital markets, which in turn experience more rapid growth because it is easier for small and start- up companies to finance investment projects, leading to a more efficient allocation of a nation’s capital. Governments also need to provide a “helping hand” to the market system since studies show that the extent of corruption in a nation is a significant determinant of economic growth. Encouraging technological progress: Solow model shows that sustained growth in income per worker must come from technological progress, however it takes it as exogenous (does not explain it). Many public policies are designed to stimulate technological progress. An example is intellectual property rights. Page 26 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 SKIPPED CHAPTER: 8.4 Chapter 9 Many economists are engaged in the task of forecasting short- run fluctuations in the economy. Business economists help their business plan for changes in the economic environment. Government economists do forecasting for two reasons: the state of the economy influences how much tax revenue the government collects, and the government can affect the economy through fiscal and monetary policy. Economists can arrive at forecasts by looking at leading indicators, which are variables that tend to fluctuate in advance of the overall economy. Some of the most used leading indicators are new orders, the number of new building permits issued, stock market indexes, money supply data, the spread between short- term and long- term interest rates, and consumer confidence surveys. These data are often used to forecast change about six to nine months in the future. Long- run vs. Short- run: in the long run, prices are flexible and can resp...
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