ECO311 - Chapter 6

13. What are three possible causes for the productivity slowdown?

The productivity slowdown could be explained by underestimates of output in the growing services sector, increases in the relative price of energy, and the costs of adopting new technologies.

14. What explains the recovery in productivity growth in the 1980s and 1990s and the reduc- tion in productivity growth beginning in 2000?

American workers then knew how to incorporate the new technologies, in particular information technology. These efficiency gains may have been realized by 2000, which explains the new slowdown, along with higher energy prices.

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

An increase in total factor productivity increases the size of the population, but has no effect on the equilibrium level of consumption per capita.

16. What was miraculous about growth in East Asian countries over the period 1966-1991? What was not miraculous about growth in these countries at this time?

During this period, growth in these countries was much larger than average. Growth rates for these countries were about three times as fast as growth in the United States. However, most of this growth can be attributed to increases in the capital stocks in these countries, and such rapid rates of growth of capital cannot be sustained for long periods of time.

15. What are the three factors that account for growth in GDP?

Growth in capital, employment, and total factor productivity account for growth in GDP.

11. What is the parameter a in the production function in equation (6-25)?

In a competitive equilibrium, the parameter a is equal to the share of capital income in total income.

1. What is the difference between exogenous growth and endogenous growth?

In exogenous growth models, growth is caused in the model by forces not explained by the model itself. Endogenous growth models examine the economic factors that cause growth.

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

In the steady state, all variables stay constant: per capita capital, output, consumption, savings. Also, this steady state is stable: whatever the initial capital (except zero), the economy will converge to this steady state.

5. Was Malthus right? Why or why not?

Malthu's model is quite successful in explaining economic growth prior to the industrial revolution. Malthu's model has little relevance for more recent growth experience.

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

Only a downward shift in the population growth function can increase the standard of living.

2. What are the seven economic growth facts?

Pre-1800: Constant Per Capita Income across Time and Space Post-1800: Sustained Growth in the Rich Countries High Investment ↔ High Standard of Living High Population Growth ↔ Low Standard of Living Divergence of Per Capita Incomes: 1800-1950 No Conditional Convergence amongst All Countries Conditional Convergence amongst the Rich Countries

10. Why is a Cobb-Douglas production function useful for analyzing economic growth?

The Cobb-Douglas production function permits a simple decomposition of economic growth into its component sources.

9. 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?

The Malthusian model gave no way out of misery, except for measures that reduce the population. Even technological advances would not raise the standard of living. The Solow model shows that it is possible to obtain a stable standard of living with growing population. And if total factor productivity increases, one can even obtain improvements in the standard of living despite population growth.

12. What does the Solow residual measure, and what are its empirical properties?

The Solow residual measures increases in real GDP that are not accounted for by increases in capital and labor. The Solow residual is highly procyclical as it explains the great majority of the cyclical component in GDP.

8. Explain what determines the golden rule quantity of capital per worker and the golden rule savings rate.

To maximize steady-state per capita consumption, the saving rate must be such that the marginal product of capital (the slope of the per capita production function) equals the population growth rate plus the depreciation rate.

7. In the Solow growth model, what are the steady state effects of an increase in the savings rate, of an increase in the population growth rate, and of an increase in total factor productivity?

With an increase in the saving rate, it becomes possible to sustain a higher level of per capita capital, and thus higher output and consumption. With an increase in the population rate, the contrary happens, as one needs to provide more newborns with the going per capita capital. A higher total factor productivity improves all per capita variables in the steady state.