Macro Section 5

c.) How much has growing physical capital per worker contributed to productivity growth? What percentage of total productivity growth is that?

0.3 x 3%= 0.9% 0.9% / 2 x 100= 45%

d.) How much has technological progress contributed to productivity growth? What percentage of total production growth is that?

2% - 0.9% = 1.1% 1.1% / 2% x 100% = 55%

a.) how fast has productivity in Erehwon grown?

3%-1%= 2% per year

b.)How fast has physical capital per worker grown?

4%-1%= 3% per year

Some economist think the high rates of growth of productivity achieved by many East Asian economies cannot be sustained? Why might they be right? What would have to happen for them to be wrong?

A country grows more slowly other things equal, when its real GDP per capita is relatively higher. This points to lower future growth for East Asian countries. However other things might not be equal: if Asian economies continue investing in human capital, if savings rate continue to be high, if governments invest infrastructure, and so on, growth might continue to accelerate

Explain the link between a country growth rate, its investment spending as a percent of GDP, and its domestic saving

A country that high domestic savings is able to achieve a high rate of investment spending as a percentage of GDP. This allows the country to achieve a high growth rate

Which of the following is the better predictor of a future high long-run growth rate: a high standard of living today or high levels of savings and investment spending?

Although it is important in determining the growth rate for some countries, the initial level of GDP per capita isn't the only factor. High rates of saving and investment appear to be better predictors of future growth than todays standard of living

Why do economist focus on real GPD per capita as a measure of economic progress rather than on some other measure, such as nominal GDP per capita or real GDP?

Economics want a measure of economic progress that rises with increases in the living standard of the average resident of a country. An increase in overall real GPD does not accurately reflect an increase in an average residents living stand because it does not count for growth in the number of residents Ex: Real GDP rises by 10% but population grows by 20% the living standard of the average resident falls: after the change the average resident only has (110/120) x100= 91.6% as much real income as before the change.

Growing physical capital per worker is responsible for how much productive growth per year

Growing physical capital per worker is responsible for 1% productivity growth per year 2% x .05 = 1%

Increases in real GDP per capita results mostly from changes in what variable? Define that variable. What other factor could lead to increased real GDP per capita? Why is this other factor not significant?

Increase in real GDP per capita result mostly from changes in productivity (or labor productivity). Productivity is defined as output per worker or output per hour. Increased labor force participation could also lead to higher real GDP per capita, but the rate of employment growth, meaning that the corresponding increase in output does not lead to an increase in output per capita

Growth accounting and total factor productivity

Long-run economic growth is sustainable if it can continue in the face of (1) limited supply of natural resources, and (2) impact of growth on the environment Role of natural resources in long-run economic growth Economic growth and the environment

The amount of physical capital per worker grows, but the level of human capital per worker and technology are unchanged

Productivity will grow, but due to diminishing marginal returns, each successive increase in physical capital per worker results in a smaller increase in productivity than the one before it

Assume that between 1942 and 2012 -The amount of physical capital per worker grows at 2% each year -Each 1% rise in physical capital per worker raises output per worker by 0.5% -No growth in human capital -Real GDP per capita rises from $30,000 to $60,000

Questions followed

The economy of Erehwon has grown 3% per year over the past 30 years. The labor force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. The average education level hasn't changed. Estimate by economists say that each 1% increase in physical capital per worker, other things equal, raises productivity by 0.3%

Questions followed

Explain the effect of growth rate on productivity: The amounts of physical and human capital per worker are unchanged, but there is significant technological progress

Significant technological progress will result in a positive growth rate of productivity even through physical capital per worker and human capital per worker are unchanged

Some economist think the best way to help African countries is for weather countries to provide more funds for basic infrastructure. Others think this policy will have no long run effect unless African countries have the financial and political means to maintain this infrastructure. What policies would you suggest?

The evidence suggest that both sets of factors matter: better infrastructure is important for growth, but so is political and financial stability. Polices should try to address both areas

By how much did total factor products grow over the time period?

There was no growth in total factor productivity because there was no technological progress. According to the Rule of 70, over 70 years a 1% growth rate would cause output to double. Real GDP per capita in this case doubled, as would be expected from a 1% productivity growth rate alone; therefor there was no change

aggregate production function

exhibits diminishing returns to physical capital