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Lecture

W2 Notes on Solow.docx

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Department
Economics
Course
ECON 255
Professor
Ashok Kotwal
Semester
Winter

Description
Notes on Solow’s Surprise: Investment Is Not the Key to Growth - Solow’s Theory: Investment in machinery cannot be a source of growth in the long run but technological advancement can  y = A ∙ f(k) - Views are shifting from Harrod-Domar conclusion that growth was proportional to investment in the short run but most economists still maintain that investment was the dominant determinant of growth in the long run - Capital fundamentalism: the belief that increasing buildings and machinery is the fundamental determinant of growth of capital fundamentalism  this is what the majority believes as the recipe of economic success [Solow’s Shocker] - Growth: refers to an increase in an individual’s standard of living - Labor productivity: average number of goods produced on average  Labor productivity can be increased by increasing machinery and labors BUT - This leads to Diminishing Returns: basically occurs when 1 factor of production is increased indefinitely relatively to another factor of production.  when the rate # of machinery is added faster than the # of labor, the productivity of a worker will decrease [The Flour Next Time]: just an analogy - The importance of knowing the most significant variables that can influence GDP - Capital Income: all the incomes accrued from direct or indirect owners of the buildings and machines  Example: corporate profits, stock dividends and interest income on loans [Not the Way to Grow] - Buying more machinery until K > L is not the solution for economic growth. By doing so, the growth at the beginning will be extremely high but in the long run, it will reach its steady state  diminishing returns to increasing machines appear - As for high-saving economies, its economy will be higher than the low-saving economies but in the long run, both economies won’t be able to sustain economic growth [It’s Technology, Stupid] - More efficient technology allows more efficient machinery. Solow said that: in the long run, the growth of production per worker has to be labor-saving technical change  Let’s assume that if all the available market is totally concentrated because of the high population, then what’s going to happen?  people migrating to another country? Developing more technology (role of education is important)s is it? Comment: Solow’s surprise works on the assumption that one factor of production is held fixed. What if the # of labor increases too? Or is it trying to point that, in the long run, when resources are becoming scarce/fixed and # of machines keep on increasing, there will
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