Econ315 T1

*If you are given output for a year and a growth rate and asked to find level of output after 10 years what formula do you use? *How to find growth rate over 10 years

* (1+g)^10 *(y10-y0)/y0

*Diminishing Returns *Constant Returns to Scale *Increasing Returns to Scale *Decreasing " "

* Increases but increases less, or at a decreasing rate, holding all inputs constant and increasing ONE input * Double Inputs, double outputs * double input -> more than 2x the output * double input -> less than double output

*Formula for average annual growth rate (use 10 years for example

((y10/y0)^1/10) - 1

Calculating Growth rate for 2 consecutive years ex. using 1980 and 1981

(GDP1981-GDP1980) _____________________ = g GDP1980

5 Basic Equations for Growth Models (Equation 2)

S = sY S- total value of saving s- savings rate Y- total income (output)

2 main assumptions of Harod Domar Model

1) Constant returns to scale -if captial and labor both double output will also double 2) Fixed coefficient production function -if 10 workers and 10$ worth of captial produce 1 computer, then 10 workers, and 20$ worth of capital will produce the same amount. -20 workers, and 10$ worth of capital will produce 1 computer you will simply have idol workers

Problems with measuring GDP

1) Economic activity not traded in market excluded from GDP/GNP -ex. subsistence agriculture 2) Economic bads -prostitution, drugs,etc. 3)Doesn't account for depletion of goods ( machinery wearing out, or depletion of natural resources) 4) Cross country comparisons - GDP in $

8 Millenium Development Goals

1) Eradicate Extreme Poverty and Hunger 2) Achieve universal primary education 3) Promote gender equality and empower women 4) Reduce Child Mortality 5) Improve maternal health 6) Combat HIV/Aids, malaria, and other diseases 7) Ensure environmental sustainability 8) Develop a global partnership for development 5

Economic Growth depends on? (2)

1) Factor accumulation - increasing the size of the capital stockor the labor force. 2) Increases in Productivity - technological advance, rise in efficiency (ex. distribution of labor)

Weaknesses of the Harod Domar Model (4)

1) Focuses to heavily on savings -savings are important and necessary but not sufficient - I must be productive 2) Knife edge equilibrium 3) capital labor ratio being fixed is a very rigid assumption (may be realistic in the short run) -for this to be true cap-lab, lab-out, and cap-out would all have to grow at the same rate to be constant, this is unrealistic 4) no role for technological progress

2 Reasons countries exhibit different growth rates + different of living

1) For countries with common characteristics ( same basic parameters f, d, n, s ) they may be on different points of the transition path (diff growth rates) - suppose country a has a lower saving rate than country B, and then country A increases savings its growth rate will be temporarily higher than country B's for some time. 2) Countries may differ in fundamental characteristics (basic parameters may be different ) (f, d, n, s)

Why does economic growth not = higher standards of living

1) Income inequality - money concentrated amongst a few rich people; rich getting richer, poor getting poorer or not doing better 2) sometimes governments seek economic growth not to improve social welfare but for their own power and glory ( presidential palaces, sports stadiums, highways, and bridges to no where) - these increase GDP but doesn't really help anyone - this is corruption 3) Income is either spent (C) or saved (Inv), Investment is important but too much can limit C and lower welfare

What are some criticisms of the HDI (2) What shows that HDI data is sufficient

* Not enough dimensions -what about income inequality, personal rights, etc.) * If data is positive and linear it means quality of life goes up as income goes up ( this would be mean it isn't a useful measurement) if data is positively correlated but there is lots of variation this means HDI is a good measurement

What does negative total factor productivity mean ( - a)

* Productivity down, inputs actually became less productive over time - could be a result of capital and labor lying idle, or you could be accumulating unproductive assets (fancy things)

what rate does the standard of living (income per worker, or output per worker) increase with technology ? (Solow Model)

* Rate θ

*How does factor accumulation affect the production function? *How does productivity change " " ?

* as economy accumulates more capital for each of its workers, output expands, shown by the upward slope of the production function, pf moves from pt. A to pt.B on the same curve (wk * gk) +(wL * gL) *As factors of production are used more efficiently or as new tech. is adopted the production function shifts upward (a) -any amount of captial/worker produces more output then it did before

*What does v stand for in the Harod Domar model? *What does a larger v imply?

* v = K/Y or the capital output ratio *larger v implies that more capital is needed to produce the same amount of output

In what type of countries is v usually higher?

* v is higher in countries that produce a larger share of capital intensive products ( those that require relatively more machinery) * v is lower in countries that are labor intensive ( less machinery is required; textile, agriculture)

Formula for technological change in the Solow Model

* Δ k_e = sy_e - (n + d + θ) k_e - k_e = capital per effective worker -saving " " - θ = rate at which technology changes

Main contributor to growth for developing countries

*Capital Accumulation *split btwn capital accumulation and TFP growth

Key ideas in classical + neoclassical growth models

*New Investment increases the capital stock. But value of investment must be greater than the depreciation of existing capital *Investment is financed by saving (S=I) *Saving comes from current income *So basically higher income leads to more investment which leads to a higher capital stock

Steady State (Solow Model)

*The point where sy = (n+d)k on the graph *Output/worker is constant total output continues to grow at rate n (same rate as population, and workforce) -basically GDP (Y) grows at the rate n, but GDP per capita (y) is constant

What ratios are constant in the harod domar model

*capital - output ratio (ex. $10 million in capital is needed to produce $5 million worth of keyboards then capital output ratio is 10:5 or 2:1) *Labor output ratio (ex. 1 worker produces 10 keyboards which is $5,000, labor output ratio is 1: 10 or 1:5,000)

Explain Knife Edge Equilibrium

*for this to be true cap-lab, lab-out, and cap-out would all have to grow at the same rate to be constant, this is unrealistic *for this to happen g = n ; n = s/v - d * if g<n labor force grows faster than capital stock , saving wouldnt be high enough to support I in new machinery sufficient to employ all workers so unemployment would rise *if g > n then capital stock grows faster than the workforce, there are not enough workers for all available machines, capital becomes idle * so unless g = n economy will not be in stable equilibrium and there is no way to get there

*Technological change in the solow model is ____ ____? * explain increases in T * L

*labor augmenting, directly enhances the input of labor, same amount of labor can now produce more output *measures amount of labor and its efficiency so it is known as effective units of labor increase in t differs from increases in L because rise in agg. income from tech. doesnt need to be split among workers, so it causes income per worker to rise higher

Why is Economic growth necessary?

*without growth individuals can become better off only through transfers of income + assets from others

Characteristics of HIgh Growth Economies (Robert and Barro)

1) Macro economic and political stability - environment needs to be conducive for I - Investors both big and small dont like to invest in volatile political and/or macro climates 2) Inv. in health and Education (esp. women) 3) Effective governance and institutions 4) Favorable environment for private enterprise (cost of doing business) 5) Trade openness (debated - gen. concensus is that if countries that trade to other countries tend to grow more) 6) favorable geography (can't conrol) -closer to the equator tend to be more poor

2 major differences btwn GDP and GNP

1) Multinationals 2) Remittances - when people send money home to families it is included in their GNP (more people trying to use GNP)

Economic Production depends on ? (2)

1) Resources (K+L) -K = capital, land, minerals, oil -L = labor 2) Technology

strengths of Harod Domar Model

1) Simplicity - easy to use, limited data requirements 2) short run predictions of expected growth rates in absence of shocks works pretty well 3) Focuses on savings and savings are important

Equations for the Solow Growth Model

1) Y/L = F (K / L, I) ----- same as y = f (k) 2) Δ K = sy - (n + d)k

disadvantages of using growth accounting formula to find a pg. 70

1) a represents a combination of influences, we cant know for sure what improvements in a should be attributed to 2) a is measured innacurately because it is the residual

Why is Economic Growth not sufficient for development

1) development is more than just rising income (includes education, health, personal/political freedoms) 2) Economic Growth (rise in total income) does not necessarily = higher standards of living for the majority

Solow Model assumptions (3)

1)Constant returns to scale 2)variable coefficients 3) diminishing returns to capital

When did economic growth improve greatly

1820

Doubling time formula

70/g

What type of production function does the Solow Growth model have?

A neoclassical production function -allows for more flexibility and substitution btwn the factors of production -capital/ labor ratio is no longer fixed but varies depending on the relative endowments of capital and labor in the economy and the production process

5 Basic Equations for Growth Models (Equation 1)

Aggregate Production Function Y = F (K,L) -Output is a function of the capital stock and labor supply - Y represents output and therefore total income

Capital Widening

An increase in capital stock that keeps pace with the expanding labor force and depreciation this occurs when sy = (n + d)k

Reasons why people may question if economic growth is desirable

Associated with materialism, consumerism, westernization of world cultures, destruction of traditional societies, environmental degradation, loss of values

Development

Broad improvement in the quality of life

Production Function -What is often combined?

Characterizes how inputs (captial and labor) are combined to produce various levels of output - capital and labor are often combined into "Capital per worker" in order to simplify analysis

Isoquants -What type of production function is this associated with

Combinations of Inputs that produce equal amounts of output -Fixed-coefficient production functions

What did the question about whether economic growth is desirable lead to ?

Economics of Happiness - on average measures of happiness tend to be positively correlated with income levels and choices which lead to better quality of life -this discussion is more meaningful in richer countries, for developing coutnries increasing income levels are essential for more opportunity and choices which lead to better quality of life

Capital deepening

Economies increase the amount of capital per worker (pos. change in k)

Growth vs. Development

Growth is the rise real national income per capita Development is broad improvemnet in the quality of life

How is development measured?

Human development index *measures in 3 dimensions * goes from 0 to 1 1) Long and Healthy Life -measured using life expectancy (20-83 yrs) 2) Access to knowledge -measured using mean years of schooling of adults and expected schooling of children (0-13yrs) 3) Decent Standard of Living (basically av. income) -measured using GNP (ppp)/ pop -(300-100,000)

How is standard of living measured?

Rise in national income per capita - GNP/Population

Capital Accumulation depends on ?

Investment - Savings lead to investment, savings are necessary but not sufficient for growth and investment - without savings you can only include labor force, and total factor productivity (TFP), but you can't have savings alone

Economic Growth

Rise in real national income per - capita Rise in value of goods and services produced by countries adjusted for inflation

5 Basic Equations for Growth Models (Equation 3)

S = I - All outputs of goods and services produced by the economy must be used for either current consumption or investment while all income earned by households must be either consumed or saved. BEcause output is equal to income, savings must be equal to investment

GNP

Sum of the value of finished goods and services produced by nationals in a given year at market prices (includes citizents who live outside the borders)

GDP

Sum of the value of finished goods and services produced domestically in a given year at market prices -includes resident foreigners (multi nationals

closed economy

an economy without trade or foreign borrowing

How can you use GDP/GNP data to make cross country comparisons if a $ goes farther or buys more in a developing country?

United Nations International Comparison Program: uses a set of "international prices" -GNP (PPP) purchasing power parity

In the harod domar the s is for

average savings for the country, constant

Economic growth requires Investment but ?

also includes insuring that inv. are productive

Sustaining econ. growth requires both generating new investment and

ensuring that the investment is productive

Calculating av. annual Growth rate for non consecutive years ex. using 1985 and 1980

g = ((GDP1985/GDP1980)^1/5 )-1

Harod Domar Model equation' *what does it imply? *what is the overall message of the model?

g= (s/v) - d *implies that capital created by investment is the main determinant of growth *save more and make productive investments and your economy will grow

How does increasing saving affect the solow model?

p.109

how does change in population growth rate affect the solow model

p.110

5 Basic Equations for Growth Models (Equation 4) Change in Capital Stock

ΔK = I - (dK) - I indicates that capital stock increases each year by the amount of investment - dK shows that capital stock decreases because of depreciation of existing capital

Simplified equation for saving, investment, and capital stock (equations 2,3, and 4)

ΔK = sY-dK

5 Basic Equations for Growth Models (Equation 5) Supply of Labor

ΔL = nL assumes labor force grows as fast as the total population