Transcript Lecture Notes III

# 2. CHAPTER
7
Economic Growth I
APPLIED MACROECONOMICS I
To compare economic well-being economists use
different measures
Instructor: Maksym Obrizan
For example, we can compare GDP per capita
converted to the US dollar
Lecture notes III
This is probably the most common but not an
ideal measure
# 3. Digression: Big Mack index and purchasing
power parity
# 4. Penn World Table
# 5. Solow growth model
# 6. Quick review of the production function
For now we will abstract from those issues and
use GDP per capita in US dollars as a
measure of economic development
We will formally develop a simplified version of
Solow growth model – a cornerstone of
modern macroeconomics
Normalizing by the labor force
# 7. The convenience of per capita notation
# 8. Demand for goods and the consumption
function
# 9. Figure 7-2
# 10. The notion of the steady state
Thus, the steady-state represents the long-run
equilibrium of the economy
# 11. Figure 7-4
# 12. Notes
# 13. Numerical example
# 14. Continued
# 15. The effects of saving on the growth
# 16.
Quote from Mankiw:
“If the saving rate is high, the economy will have
a large capital stock and a high level of output. If
the saving rate is low, the economy will have a
small capital stock and a low level of output.”
# 17. Capital accumulation: the Golden Rule
# 18. Comparing steady-states
A benevolent policymaker may want to maximize
the steady state level of consumption
The level of capital that achieves the highest level
of consumption is called the Golden Rule
level of capital
# 19. Figure 7-7
# 20. Computing the steady state
# 21. A numerical example
# 22. Notes
# 23. Case I: Too much capital
# 24. Case II: Too little capital
# 25. The effects of population growth
# 26. Re-computing the steady-state
# 27. Quote from Mankiw:
“Because the number of workers is growing at
rate n, however, total capital and total output
must also be growing at rate n.”
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# 32.
# 33. CHAPTER 8
Economic Growth II
# 34. Technological progress in the Solow model
In this chapter we will try to make the Solow
growth model more realistic by allowing for
technological progress
This is called labor augmenting technological
progress
# 35. The steady state with technological
progress
# 36.
# 37. Notes
# 38. Quote from Mankiw:
“Once the economy is in steady state, the rate of
growth of output per worker depends only on
the rate of technological progress.
According to the Solow model, only
technological progress can explain persistently
rising living standards.”
# 39. Modification of the Golden Rule
# 40. Policies to promote growth
# 41. Empirical relevance of the Solow model
# 42. Convergence
Quote from Mankiw:
“According to the Solow model, technological
progress causes the values of many variables to
rise together in the steady state.
This property, called balanced growth, does a
good job of describing the long-run data for the
U.S. economy.”
# 43. Endogenizing growth
Solow model does not explain technological
progress – it is simply assumed in the model
# 44. Quote from Mankiw: “To understand fully
the process of economic growth, we need to go
beyond the Solow model and develop models
that explain technological progress.
Models that do this often go by the label
endogenous growth theory, because they
reject the Solow model’s assumption of
exogenous technological change.”
# 45. AK model of growth
# 46. Notes
# 47. A two-sector model
# 48.