econ exam 3 study set

Allocating the economy's investment

equalize tax treatment of all types of capital in all industries, industrial policy

in the two-sector model, u is

exogenous, fraction of labor in research

solow predicts Y/L and K/L grow at the same rate of

g, so K/Y should be constant

industrial policy

government should actively encourage investment in capital of certain types or in certain industries, because they may have positive externalities that private investors don't consider encourages specific industries that are key for rapid tech progress

solow predicts that, other things equal, poor countries (with lower Y/L and K/L) should

grow faster than the rich ones

if sA > depreciation then income will __________ and investment is the

grow forever; "engine of growth" permenant growth rate depends on s (it does not in the solow model)

countries with a higher physical or human capital per worker tend to have

higher production efficiency

the golden rule level of the steady state capital stock:

implies a choice of a particuluar saving rate

differences in factor accumulation and/or differences in production efficiency must account for all international diferences in:

income per person

how to increase the saving rate

reduce the government budget deficit (or increase budget surplus) increase incentives for private saving

when an economy begins the golden rule, reaching the golden rule:

requires initially reducing consumption to increase consumption in the future.

sy=sf(k)

saving and investment per efffective worker

(Delta)k =

savings rate - breakeven investment

conditional convergence occurs when economies converge to:

thier own, individual steady states

capital markets

to help financial capital flow to the best investment projects

a corrpution free government

to promote compeititon, enforce contracts, etc

legal institutions

to protect property rights

solow predicts real wage grows at the same rate as Y/L

while real rental price is constant

in the solow growth model of chapter 7, where s is the saving rate, y is the output per worker, and i is investment per worker, consumption per worker (c) equals:

(1-s)y

c* is maximized when

MPK = dep + n+g or MPK-dep = n+g

key difference between basic model and solow:

MPK is constant here, and diminishes in solow

if (MPK- dep) < (n+g)

US economy is above the golen rule steady state, and should reduce s

if (MPk - dep) > (n=g)

US economy is below golden rule steady state, should incease s

manufacturing equation

Y= F[K,(1-u)EL]

research equation

delta E = g(u)E

in the steady state, manufacturing output per worker and the standard of living grow at the rate

delta E/E = g(u)

equation of motion for total capital also the capital accumulation

delta K = sY(investment) - depK(depreciation)

k = 2.5y ( capital stock is about 2.5 times one year's gdp) depk=0.1y (about 10% of gdp is used to replace depreciated capital) MPK x k = 0.3y ( capital income is about 30% of gdp) n+g = 0.03

depk/k = 0.1y/2.5y= dep = 0.04 MPK/k= 0.3/2.5= 0.12 MPK-dep=0.12-0.04=0.08 therefore, 0.08 > 0.03 The golden rule is below the golden steady state.

patent laws

encourage innovation by granting temporary monopolies to inventors of new products

possible explanations for the correlation between capital per worker and production efficiency:

- production efficiency encourages capital accumulation - capital accumulation has externalities that raise efficiency - a third, unkown variable causes capital accumlation and efficiency to be higher in some countires than others

increase incentive for private saving

- reduce capital gains tax, corportate income estate tax, as they discourage saving - replace federal income tax with a consumption tax - expand tax incentives for IRAs (individual retirement accounts) and other retiremennt savings accounts

possible problems with industrial policy

- the government may not have the ability to "pick winners" (choose industries with the highest return to capital or biggest externalities) - politics (e.g. campaign contributions) rather than economics may influence which industries get preferential treatment

two sector model

-manufaturing firms produce goods -research universities produce knowledge that increases labor efficiency in manufacturing

firms profit from research:

-patents create a stream of monopoly profits -extra profit from being first on the market with a new product

in the solow growth model of an economy with no population growth and no technological progress, the higher the steady capital-per-worker ratio, the higher the steady state:

level of output per worker

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of total output and ______ rate of growth of output per worker as/than the country with the lower saving rate.

a higher; the same

Endogenous Growth Theory

a set of models in which the growth rate of productivity and living standards is endogenous

according to kremer, large populations:

are a prerequisite for technological advances and higher living standards.

(dep+n+g)k

breakeven investment

k=K/LE

capital per effective worker

differences in income per capita among countries can be due to differences in:

capital per worker, the efficiency of production(the height of the production function)

the golden rule level of capital accumulation is the steady state with the highest level of:

consumption per worker

solow model really predicts is conditional convergence

countries converge to their own steady states, which are determined by saving, population growth, and education

schumpeter (1942) coined what term

creative destruction - to describe displacements resulting from technological progress

which of the following changes would bring the US capital stock, currently below the golden rule level, closer to the steady-state, consumption-maximizing level?

increasing the saving rate

the endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to include:

knowledge

to determine whether an economy is operating at its golden rule level of capital stock, a policymaker must determine the steady state saving rate that produces the:

largest consumption per worker

establishing the rights institutions

legal institutions, capital markets, corruption-free government

empricial results justify substantial government subsidies to research based on the finding that the private return to research is:

less than the social return to research

in the two-sector endogenous growth model, the fraction of labor in universities (u) affects the steady-state:

level of income, growth rate of income, and growth rate of the stock of knowledge

Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state the country with the higher population growth rate will have a ______ level of total output and ______ rate of growth of output per worker as/than the country with the lower population growth rate.

lower; the same

in the golden rulle, steady state,

marginal product of captial net of depreciation equals the population growth rate plus the rate of tech progress

in the solow model with technological progress, the steady-state growth rate of total output is:

n+g

with poplulation growth at rate n and labor-augmenting technological progress at rate g, the golden rule state requires that the marginal product of capital (MPK):

net of depreciation be equal to n+g

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:

new product producers driving incumbent producers out of business

A possible externality associated with the process of accumulating new capital is that:

new production processes may be devised

y=Y/LE=

output per effective worker

encouraging tech progress

patent laws, tax incentives for R&D, grants to fund basic research at universities, industrial policy

according to malthus, large populations:

place great strains on an economy's productive resources, resulting in perpetual poverty.

three categories of captial

private capital stock, public infrastructure, human capital: the knowledge and skills that workers acquire through education

y=f(k)

production function per effective worker

one explantation for greater economic development in moderate versus topical climates is that insitutions established by colonial settlers in moderate climates __________ while, institutions established by colonists in tropical climates ___________.

protected property rights, were extractive and authoritarian

total output

steady growth rate of n+g

output per worker in the solow model with technoogical change

steady state growth rate of g

solow model is

sustained growth in living standards is due to technology progess, the rate of tech progess is exogenous

endogenous growth theory rejects the assumption of exogenous:

technological change

advocates of endogenous growth theory argue

that knowledge is a type of captial

break even investment

the amount of investment necessary to keep k constant

the basic model: production function: Y=AK where A is

the amount of output for each unit of capital (exogenous and constant)

The rate of labor-augmenting technological progress (g) is the growth rate of:

the efficiency of labor

in the solow growth model of an economy with population growth but no technological progress, in the golden rule steady state, the marginal product of capital minus the rate of depreciation equals:

the population growth rate

In the Solow growth model with population growth and technological change, the steady-state growth rate of income per person depends on:

the rate of technological progress

If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady- state level of income per worker in the economy with the lower saving rate:

will be at a lower level than the steady state of the high-saving economy

increasing the US saving rate

would increase consumption per capita in the long run