It appears that low income countries grow faster than high income countries

It appears that low income countries grow faster than

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It appears that low income countries grow faster than high income countries. This is particularly true for Asian countries. Convergence (thus far) has not been the rule in Africa (but we may get there!) 13

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| faculty of economics and business 20-12-2016 The Solow growth model (1) In order to understand where economic growth comes from, we build a new model. This model will show that: Capital accumulation (through saving) can cause growth of income per worker,…but it cannot sustain it. Sustained growth of income per worker is the consequence of technological progress. 14
| faculty of economics and business 20-12-2016 The Solow growth model (2) The relation between output and inputs is given by the aggregate production function: where: Y = output K = capital N = labour A = “state of technology” (how much can be produced from a given amount of capital and labour at any time) The function F tells us how much is produced given the amounts of capital and labour and the state of technology 15 ) , , ( ) ( ) ( ) ( A N K F Y

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| faculty of economics and business 20-12-2016 Technological progress The level of technology determines how much can be produced with a certain amount of capital and labour at any time. Therefore, technology influences the production function. Today, we assume that there is no technological progress. Next lecture, we drop this assumption. 16
| faculty of economics and business 20-12-2016 Intermezzo - returns to scale Constant returns to scale is a property of the economy in which, if the scale of operation is doubled – that is, if the quantities of capital K and labour N are doubled – then output Y will also double. Or more generally, for any number x , 17 2 2 2 Y F K N ( , ) x Y F x K x N ( , )

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| faculty of economics and business 20-12-2016 Output per worker Constant returns to scale implies that we can rewrite the aggregate production function as: As capital per worker K/N increases, so does output per worker Y/N . Capital accumulation (turning saving into productive assets) increases output per worker. 18 Y N F K N N N F K N , , 1
| faculty of economics and business 20-12-2016 Output and capital per worker Increases in capital per worker lead to increases in output per worker. However, increases in capital per worker lead to smaller and smaller increases in output per worker (decreasing returns). 19 Mathematical note: First-order derivatives are positive, and second-order derivatives are negative.

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| faculty of economics and business 20-12-2016 Output and technology Improvements in technology lead to a higher level of output per worker for a given level of capital per worker. 20
| faculty of economics and business 20-12-2016 The role of saving The effects of the saving rate on capital and output per worker are important: Capital accumulation requires saving to turn into productive investment.

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