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Topic 5: Long- Run Economic Growth (Endogenous growth (constant MPK (human…
Topic 5: Long- Run Economic Growth
Output grows faster than population => GDP per capital increase => average standard of living increase
Solow model
Factors affecting the long- run standard of living
How national's economic growth change over time?
Analyze relationship between capital accumulation and growth
Assumptions
size of population = size of labor force
NX = 0 (closed economy)
G = 0
Golden rule capital- labor ratio
Factors affecting steady state k
Higher population growth => a lower capital- labor ratio => lower k*
Higher productivity => a higher capital- labor ratio => higher k*
Higher savings rate => higher capital- labor ration => higher k*
Endogenous growth
explaining productivity growth
MPK is not diminishing
savings rate affects long- run growth rate (not true in Solow)
level of productivity will affect long- run growth rate
constant MPK
human capital
: increase in human capital (such as knowledge, skills, and training of individuals) offsets decline in MPK from having more physical capital
research and development
long- run growth
to raise A
to raise s
Steady state k
The model implication
with
no productivity growth
, the
economy reaches a steady state
, with constant capital- labor ratio, output per worker, and consumption per worker
with no productivity growth, there is no economic growth once the economy reaches steady state