chap 12 Growth Theory
define aggregate production function
the relationship between ALL inputs used and economy total output (GDP)
The original Solow model focuses on what as the main source of economic growth?
capital → The original Solow growth model basically says that for growth to occur, capital investment is necessary.
T or F: from the previous summary.... we can say that capital alone cant explain sustained growth and that we need a more advanced version of hte Solow Growth Model to explain economic growth
true
T or F: institutions determine incentives for innovation. production
true
T or F:The key difference between modern growth theory and the Solow theory is that technological change is ENDOGENOUS in modern growth theory while it is EXOGENOUS in the Solow theory.
true
T or F: economic growth (% change of real GDP per capita) is important to average people
true and it helps us understand how loving standards might be improved around the world
T or F: technological change ROTATES the whole PPPf upwards
true... the whole curve does not move just the tip on the right
how can/what certain government policies can foster economic growth?
!!!Resources (factors of production, inputs: land, natural resources, effective labor, physical capital, human capital) !!!Technology !!!Institutions (property rights, efficient taxes)
what are keys to higher living standards (4)
- establish rule of law - provide basic education and health care - inc the amount of capital per hour worked -adopt the best technology
True statements about technological change in the Solow model.
1. Technological change is not due to any inherent characteristics of the economy. 2. Technological change occurs exogenously!!!! 3. Technological change is random!!!
what are implications of the Solow Growth Model?
1. steady states: no net investment since cost of investment > return on investment 2. convergence: over time per capita GDP across countries will equalize as nations approach a steady state -Logic of the Solow growth model: rich nations are rich because they have more capital but as nations approach the steady state the return to capital declines and growth slows/stops --> WRONG -SUMMARY: data shows 1. growth in wealthy nations outspaces poor countries 2. no sign of convergence
what is the alternative model new growth theory?
CALLED: exogenous growth model: accumulation of knowledge capital is key to economic growth, previous model did not account for technological change
Why are the proper institutions important for creating economic growth?
Institutions create the incentive structure in which growth can occur → With the right institutions, people are given the incentive to innovate and increase production
what are the basics of the Solow Growth Model?
Rule of law: Y = A * F A=technology F=the 3 types of resoruces aka factors of production
How does new/modern growth theory model technology and technological change?
Technology change is endogenous and depends on factors that currently exist in the economy → Modern growth theory realizes that institutions have an effect on how technological progress and innovation occur. Thus, technology is now endogenous, meaning it depends on the current state of an economy.
How do Solow and Exogenous Growth model differ?
The exogenous growth model ALLOWS for technological change, while the basic model doesn't.
Does technological change occur exogenously?
YES ..the growth is independent of factors in the economy
the solow growth model emphasizes ____
capital - inc in Q of capital per hour worked (& inc in technology) determine the growth of the real GDP per hour worked and economies S.O.L
what is the Solow Growth Model?
a nations production function for the entire economy over a period of time which describes the relationship between the inputs a firm uses and the outputs it creates
describe pre worker production function
describes labor productivity...relationship between real GDP/ hr worked and and capital per hour -1st units of capital are most productive = most increase in output/ hr -additional inc in capital = diminishing returns assumption = solow growth model
what are the key words of the Solow growth model definition?
diminishing marginal returns to capital
be able to apply the Solow Growth model to explain why growth rates differ across countries
each country has different inputs which will produce difference levels of output
exogenous growth vs endogenous growth
exogenous: growth independent of factors in the economy endogenous: depends on current factors in economy
how does technology affect growth?
if an economy has little capital then an inc in capital can boost Real GDP per capita SIGNIFIGANTLY ... but if an economy already has lots of capital then this change becomes more effective way to inc output per hour
According to the idea of diminishing marginal product, where will capital have the highest marginal productivity?
in countries with a small amount of capital → Diminishing MP says that if there is already a large amount of an input, additional inputs of that type will have lower MP. Adding capital where there is very little or no capital will greatly increase productivity at the margin.
Consider the Solow growth model. When the economy has reached the point of ______ , it is said to have achieved a steady state
no new net investment
The basic Solow growth model focuses on _____ capital ONLY as the primary source of economic growth (says for growth to occur, capital investment in necessary)
physical NOT human, institutions, or government policy
key work for difference between the 2 types of growth
technological change by chance or by means of economic incentives/institutions).