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ECON 3550
Alena Kimakova

CH 4GD ReadingsTheories of Economic Growth1 longrun economic growth may be the single most fundamental determinant of human welfare around the world2 despite efforts and progress puzzle of economic growth remains unsolved as we are far from a complete understanding of the deep determinants of growthThis chapteroKey contributions of the theory of economic growthoIntroduces underlying theory and most important basic models of economic growthoWe identify specific mathematical relationships betweenQuantity of capital and labourTheir productivityAnd resulting aggregate outputRobert SolowoFather of modern growth theoryoAll theory depends on assumptions that are not quite true That is what makes it theory The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitiveThe Basic Growth ModelFundamental models of economic output and economic growthoBased on small number of equationsoRelateSavingInvestmentPopulation growthTo the size of workforce and capital stockWhich is linked to aggregate production of single goodoFocus onLevels of investment labour productivity and outputThen examines changes in these variablesoOur ultimate focusExplore key determinants of the change in outputOn the rate of economic growthBasic model under examination 5 equationso1 Aggregate production function o2 Equation determining level of savingo3 Savinginvestment identityo4 Statement relating new investment to changes in the capital stocko5 Expression for the growth rate of the labour forceProduction functionoPresent in all standard growth modelsoRelates the number of employees and machines to size of firms outputoTextile factoryHow much more output the factory could produce if Hired 50 additional workersPurchased five more looms1 Aggregate production functionoNational or economywide leveloDescribing the relationship of the size of a countrysTotal labour forceValue of its capital stockWith level of countrys GDP total outputoYtotal output total incomeoKcapital stockoLlabour supplyYFKL 1Output is a function denoted by F of capital stock and labour supplyAs capital stock and labour supply grow output expandsFunction FoHow much output expands in response to changes in K and LEconomic growth occurs when you increase either or bothoCapital stockNew investment in factories machinery equipment roads other infrastructureoLabour force size2 Equation determining level of savingoSsY 2Stotal value of savingYtotal output total incomesaverage saving ratea constantif average saving rate is 20total income is 10 billionvalue of saving is 2 billion3 Savinginvestment identityoIn closed economy no trade or foreign borrowingsavinginvestmentall output of goods and services produced by the economy used for consumption or investmentall income earned by household either consumed or savedbecause outputincome it follows that savinginvestmentSI 34 Statement relating new investment to changes in the capital stockoShow how capital stock changes over timeo2 forces determine changes in capital stock1 new investment adds to capital stock2 depreciation slowly erodes value of existing capital stock over timeoChange in the capital stock as KIdK 4 dthe rate of depreciationIindicating that capital stock increases each year by amount of new investment d X Kshows that capital stock decreases every year because of depreciationImportant example on pg 935 Expression for the growth rate of the labour forceoFocuses on supply of labouroAccurate assumption that over time labour force grows exactly as fast as total populationoLnL 5
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