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ECO 360 Final Exam Study Guide

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University of Toronto St. George
Jack Carr

Solow, denison, Krugman, Baumol, Lewis Solow-]o}l]L} }LLLZZ]]LZ]ZK}o7oZ}7]}ZL[o]LZ}}Z ZL}o}2] o progress occurs. The endogenous growth theory explains it -an economy will always converge towards a steady rate of growth through tech. progress and labor force growth -Total factor productivity is contribution to output that is not from labor and capital, TFP drives labor productivity by 80%, remains is due to higher capital ratio through time (but there is diminishing returns to capital) -only 12.5% of growth in output per capita in the 1909-1949 period in the United States was due to factor accumulation -- leaving 87.5% to be explained by technical progress! This is a bit dispiriting as it implies that the overwhelming majority of the growth that is empirically observed is outside the explanatory power of the Solow-Swan growth model! -difference between rich and poor countries explained by rich countries investing more and have lower population growth rate, more capital per worker, higher labor productivity -per capita growth will eventually cease as dimishing returns to capital set in, tech. progress can offset the tendency for marginal product of capital to fall -tech. change increases labor productivity and increases in labor productivity generate higher standards of living, greater real wages and profits and larger gov;t tax revenue Lewis 1) -undistorted competition in the product market - in order to have a healthy economy, the most productive firms should win - more productive firms expand and take market shares,overall productivity of the country increases. - less productive firms go out of business or increase productivity. -Competition makes productivity increase, -less intense competition, slower productivity growth. -Market distortions explain difference between GDP per capita of US and other rich countries 2)-Innovations, allow innovators to make more profits, invest more, take market share away from competitors, profits will return to normal after a period, in which the level of productivity is at a higher level 3)-Too much government influence restricts productivity growth -Protection of less productive firms is a regular occurrence in industrial countries such as France, Germany and Japan. -best practice retailers are prevented from expanding as fast as they can thus, productivity growth is slower. -9} ]L2}oLZK}KL}[]oZ]ooZ]L }L}K] 2}Z: -Too much government influence has proved that old factories and companies are protected against bankruptcy while they keep productivity at a minimum. Unsuccessful owners be allowed to fail and workers have to find new jobs. -Product market distortions are much more important than labor market distortions. -govt tax heavily on legitimate business as part of economy is informal -If able to keep wage rates down, higher profits, the profits are invested back for higher economic growth more investment(increase in capital equipment), industry expands, more labor demand -Labor force leaving agriculture for higher pay -labor management relationship is different in Japan -lifetime labor vs high labor turnover in US -the agricultural sector provides unlimited supplies of labor to industrial sector and pays a subsistence wage, as the industrial sector expands, employment and output increase, share of profits increase -eventually surplus labor is exhausted. Wage rate rises, real wage rise with increasing productivity Krugman-Increasing GDP per capita www.notesolution.come) 1) Put larger portion of the population to work-works for a while if a substantial fraction of population is LKo}7}Z} ]o ZL2]L2ZL2}Z7 L]L Z}o]}LKo}} L[ increase it to 105%. 2) Put a smaller fraction of output aside as investment for the future and devote more productive capacity to manufacture goods for current consumption-can consume more for a while by investing less, will cut into ability to consume later 3) Can import more without selling more-have to borrow or sell assets to pay for additional imports 4) can get a better price for exports so able to afford more imports-how to persuade foreigners to pay more for goods, only way is to make the goods better, productivity Krugman-1973, magic went away, economic growth is magic-labor productivity is magic as well 1991-avg American family income went up by 5%, got that from working longer hours Two types of economists-Policy Entrepreneurs-offer politicians simple solutions to complex problems, analysis are flawed-(thurow, prestowitz), wrong solutions Policy entrepreneurs said countries must be competitive, is Canada going to be competitive, Krugman says countries are not competitive, industries within the country is competitive Policy entrepreneurs-countries with lower productivity will not be competitive, will fall backwards, Krugman-look at comparative advantage, if countries engage in trade with comparative, both achieve strong trade Economic war between US, Japan and Germany-Thurow, US decided to lose the battle Krugman-problem between communitarian and individualistic capitalism -suppose US demands Japan to increase imports from US, Japan retaliates, US counters Solution: raise labor productivity in US, increase R&D funds, improve education, encourage US households to save -Depression, runaway inflation, and civil war can make a country poor, but only productivity growth can make it rich -only way in the long run to increase standard of living is to increase labor productivity -in 1967, Fortune magazine surveyed American Industry, how much will real wage increase in the next 25 years, real wage should increase 150%, ZKZ^ZK[ZK]Zl of extrapolation from past data Why did productivity growth slow down? 3 different stories that account for slowdown in US 1) Technological factors-no new basic technologies, except computers in the IT sector is coming forward, but it takes a long time for a major new technology to have a major impact-industrial revolution-textile innovation, takes years for real wage to increase 2) Sociological explanation-decline in education standards in the US, education standards was falling, motivation is not the same, between 1960 and 1990, public school students increase by 10% in school, increase in teachers in the same period 70%, the end product, high school system is still poorly educated, 3) Political explanation-Z]2ZZ7]222}[]L}oKL7o}Z]L L]Z}LLZ}Z]2Z taxes become more risk averse, workers choose leisure time, spend minimum time at job, more regulation-anti- labor productivity, more hours for the same task How does Krugman bring the magic back? US had 2 key problems-low productivity and rising poverty(income distribution problem) -2}[ZZ}oL}} } ZZ}oKZ]Zo7Z2}[ }o9K]]22o]}L7 ]7]K} education, improved funding for R&D, encourage savings - }L[Z]o]}]K}]ZZL}o]]L2}]KLZ}L]Z]o]}]Z} worker(labor productivity) Denison
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