Chapter 6 Long Run Economic Growth
Y = A . F (K,N)
∆Y/Y = ∆A/A + a(k). ∆K/K + a(n). ∆N/N: growth Accounting equation
- It provides useful information about the sources of growth. However, it takes ∆K/K and ∆N/N as
given. With the growth model, we want to understand:
1) The relationship between a nation’s “standards of living” and saving rate, population and its
technological growth. (the dynamics of growth)
2) The way in which economic growth evolves over time.
3) Whether poor and rich nation come closer to each other over time.
Where, ∆X/X: rate of growth
Setup of the model:
- Economy is closed and there is no government purchases
- The population and labour force grow at a fixed rate and the labour force is a fixed portion off
- Part of output produced each year is invested new capital or replacing the worn out.
Y t output produced in year t C t consumption in year t
It= gross (total) investment in year t N t number of workers at the beginning of year t
K t capital stock at the beginning of year t yt= Y tN =toutput “per worker”
ct= C /t =tconsumption per worker kt= K /t =tcapital per worker (capital – labour ratio)
yt= A f (k t , per worker production function
Features of per worker production function:
- Starts from the origin
- Slopes upward from the left to right
- Slope falls as k rises (due to diminishing MPK)
Steady-state growth it is a feature of an economy in which all variables grow (or contract) at a constant
rate. If the rate is maintained indefinitely, steady-state exists. In other words, in the absence of productivity growth, the economy reaches a steady-state in the long
In that long equilibrium, y , c atd t do nottchange over time.
In a closed economy:
Y t C +tI t
C = Y - I
t t t
Consumption is the residual of income over investment
Investment in a