Macroeconomics Chapter 7 Terms and Questions

What was the standard of living like before the Industrial Revolution?

The standard of living was mostly the same over time and across countries.

What has the correlation between population growth rate and output per worker across countries been like?

There exists a negative correlation.

What has the correlation between rate of investment and output per worker across countries been like?

There exists a positive correlation.

What is the correlation across countries between the level of output per capita in 1960 and the average rate of growth in output per capita between 1960-2007?

There exists no correlation.

What are three possible causes for the productivity slowdown?

1. Errors in measuring aggregate output; 2. Errors in measuring inputs to production mainly 3. Learning costs due to the adoption of new information technology.

Productivity slowdown

A decrease in the rate of measured total factor productivity growth beginning in the late 1960s and continuing into the 1980s.

Steady State

A long-run equilibrium or rest point. Both Malthusian and Solow models have the property that the economy converges to a single steady state.

Endogeneous growth model

A model in which growth is caused by forces determined by the model

Exogeneous Growth Model

A model in which growth is not caused by forces determined by the model

What can increase the standard of living in the Malthusian model?

The standard of living can only increase in the long run when population growth is reduced, such as a one-child policy.

What are the characteristics of a steady state in the Solow growth model?

In the absence of a change in total factor productivity, the output per worker converges to a steady state level. All the real aggregate quantities grow at the rate of n, which is the growth rate of the labor force.

In what sense does the Solow growth model give optimistic conclusions about the prospects for improvement in the standard of living, relative to the Malthusian model?

In the long run the sustainable increase in the standard of living can be possible by ever-increasing total factor productivity. Unlike the Malthusian model, the increase in total factor productivity is not wasted by the increase in population. Thus the Solow model is much more optimistic than the Malthusian model.

What is the effect of an increase in total factor productivity on steady state population and consumption per worker in the Malthusian model?

In the long run, the increase in productivity has no effect on consumption per worker, but the population increases.

In the Solow growth model, what is the steady state effect of an increase in the population growth rate?

Increase in population will lead to the decrease of the steady state capital per worker.

In the Solow growth model, what is the steady state effect of an increase in total factor productivity?

Increase in total factor productivity will lead to the increase of the steady state capital per worker.

Was Malthus right? Why or why not?

Malthus was wrong. 1. Malthus does not allow the capital stock to grow in his model, as it is easy to increase capital than land, which is a limited resource. 2. Malthus did not take into account all the economic forces on population growth. While the standard of living decreases the death rate, it also decreases the birth rate.

Where has per capita income growth been sustained since the Industrial revolution? In the US, what has the average annual growth in per capita income been since 1900?

Per capita income growth has been sustained in the richest countries. In the US, average annual growth in per capita income has been about 25 since 1900.

In the Solow growth model, what is the steady state effect of an increase in the savings rate?

Steady state growth rate will shift upwards thus leading to an increase the steady state capital per worker. S is the savings rate.

Why is a Cobb-Douglass production function useful for analyzing economic growth?

The Cobb-Douglas production function provides a good fit for the aggregate data of US and it's also a good analytical tool for growth accounting. Since it's providing all the necessary data, it is considered to be useful for analyzing economic growth.

What is the Solow residual measure, and what are its empirical properties?

The Solow residual measures the total factor productivity. The main empirical property of it is that there are cyclical fluctuations in Solow residuals about trend growth.

Between which countries has the differences in per capita incomes widened between 1800 and 1950?

The countries of Western Europe, the US, Canada, Australia, and New Zealand, as a group, and the rest of the world.

Explain what determines the golden rule quantity of capital per worker.

The golden rule quantity of capital per worker depends on the quantity of savings in the current period, which is equal to the quantity of investment plus the quantity of current capital that remains in the future after depreciation. The equation is: k* = ((s*z*f(k*))/(1+n)) + (((1-d)*k*)/(1+n))

Explain what determines the golden rule savings rate.

The golden rule saving rate is a function of income that is sY = I, that is saving rate is equal to investment level. The golden rule saving rate is dependent on the golden rule output per worker which eventually depends on capital per worker.

Golden rule quantity of capital per worker

The quantity of capital per worker that maximizes consumption per worker in the steady state.

What explains the recovery in productivity growth in the 1980s and the 1990s and the reduction in productivity growth beginning in 2000?

The recovery in productivity growth in the 1980s and 1990s is due to the learning costs of new information technology decrease by the mid-1980s. The lower productivity growth in beginning in 2000 is due to the rapid increase in energy price after 2000.

Golden rule savings rate

The savings rate that implies consumption per worker is maximized in the steady state of a competitive equilibrium

Growth accounting

Uses the production function and data on aggregate output, the capital input, the labor input, to measure the contributions of growth in capital, the labor force, and total factor productivity to growth in aggregate output

Are richer countries more alike in terms of rates of growth of real per capita income than poor countries?

Yes

What is parameter a in the production function F(K, N) = (K^a)*N^(1-a)

a is fraction of income that goes to capital input. Thus, (1-a) is the labor share of income.

Equation for Steady State

s*z*f(k*) = (n+d)k* s is the savings rate z is the technology variable n is the population parameter d is the deprectiation rate.

Solow Per-Worker Production Function

y = z*f(k), where y is output per worker, z is total factor productivity, k is the quantity of capital per worker, and fi is a function. The per-worker production function describes the relationship between output per worker and capital per worker, given constant returns to scale.

Malthusian Per-worker production function

y = z*f(l), where y is output per worker, z is total factor productivity, l is the quantity of land per worker, and f is a function. This describes the relationship between output per worker and land per worker, given constant returns to scale.