Econ 2020: chapter 12: growth theory

Production function

Describes the relationship between the inputs the firm uses and the output it creates

What are the two key properties of the aggregate production function at the center of Solow's first contribution?

-diminishing marginal product -Focus on capital resources

How can an increase in educational opportunities increase growth/ affect a nations production function?

Additional education opportunities creat higher human capital, and opens up room for technological change as well. The entire production function would shift upward due to the institutional change.

Explain why a nation can't just keep growing by adding more capital.

Because of diminishing marginal product. Output increases with capital, but each additional unto of capital yields less output as it reaches a steady state.

Modern economic growth theory points to three sources of economic growth. What are they and give an example of each.

Chuck island example: Natural resources: fruit and bamboo Human capital: his time/ knowledge. Physical capital: bamboo ladder

Aggregate production function

Describes the relationship among all the inputs used in the macroeconomy and the total output (GDP) of that economy.

China is a land of vast resources. In addition, technology is easily transportable across international borders. If we rule out these two sources of growth, to what can we attribute the economic growth in China since 1979?

Endogenous growth, which is the growth that happens inside an economy, is the result of institutions effecting economic growth.

The Solow model assumes that technology changes are exogenous. What does this mean? Why does this matter for growth policy? What does this assumption imply about growth rates across nations over time?

Exogenous change means that the technological are due to factors outside a given economy. This matters because developing countries need the latest technologies embedded in their capital goods. This implies that even countries who do get foreign aid may not end up prospering in the long run because it's a luck of the draw thing

Depreciation

Fall in a value of a resource over time

Endogenous growth

Growth driven by factors inside the economy

Exogenous growth

Growth that is independent of any factors in the economy. Technology change.

Net investment

Investment - depreciation

The basic Solow growth model implies convergence. What is convergence? What key assumption about the marginal product of capital implies convergence?

Per capita GDP levels across nations will equalize as nations approach a steady state. A key assumption about Marginal product is that it increases at a decreasing rate.

Marginal product

The change in output divided by the change in input. Diminishing in a one person economy

Convergence

The idea that per capita GDP levels across nations will equalize as nations approach a steady state.

Diminishing marginal product

When the marginal product of an input falls as the quantity of the input rises

Steady state

the condition of the macroeconomy when there is no new net investment.