1、Questions What are the principal determinants of long-run economic growth?What equilibrium condition is useful in analyzing long-run growth?How quickly does an economy head for its steady-state growth path?1Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Questions What effect doe
2、s faster population growth have on long-run growth?What effect does a higher savings rate have on long-run growth?2Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Long-Run EconomicGrowth.is the most important aspect of how the economy performs can be accelerated by good economic
3、policies can be retarded by bad economic policies3Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Long-Run Economic Growth Policies and initial conditions affect growth through two channelstheir impact on the level of technology multiplies the efficiency of labortheir impact on t
4、he capital intensity of the economy the stock of machines,equipment,and buildings that the average worker has at his or her disposal4Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Technology leads to a higher efficiency of laborskills and education of the labor forceability of t
5、he labor force to handle modern machinesthe efficiency with which the economys businesses and markets function Economists are good at analyzing the consequences of better technologyhave less to say about the sources 5Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Capital Intensi
6、ty There is a direct relationship between capital-intensity and productivity Two principal determinantsinvestment effort the share of total production saved and invested in order to increase the capital stockinvestment requirements how much of new investment is used to equip new workers with the sta
7、ndard level of capital or to replace worn-out or obsolete capital6Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Standard Growth Model Also called the Solow model Steady-state balanced-growth equilibriumthe capital intensity of the economy is stablethe economys capital stock and
8、 level of real GDP are growing at the same ratethe economys capital-output ratio is constant7Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Standard Growth Model First component is the production functiontells us how the productive resources of the economy can be used to produce
9、 and determine the level of outputEF(K/L),(Y/L)Cobb-Douglas production function-1(E)(K/L)(Y/L)8Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Standard Growth Model Parameters of the modelE is the efficiency of labor a higher level of E means that more output per worker can be pr
10、oduced for each possible value of the capital stock per worker measures how fast diminishing marginal returns to investment set in-1(E)(K/L)(Y/L)9Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Standard Growth Model 01a level of near zero means that the extra amount of output mad
11、e possible by each additional unit of capital declines very quickly as the capital stock increases-1(E)(K/L)(Y/L)10Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.1-The Cobb-Douglas Production Function for Parameter Near Zero11Copyright 2002 by The McGraw-Hill Companies,
12、Inc.All rights reserved.Standard Growth Model 0s/(n+g+)the capital-output ratio will be shrinking If ts/(n+g+)the capital-output ratio will be growing40Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.12-Growth of the Capital-Output Ratio as a Function of the Level of the
13、 Capital-Output Ratio41Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Steady-State Growth Equilibrium If t=s/(n+g+)the growth rate of the capital-output ratio will be zerothe capital-output ratio will be stable(neither shrinking nor growing)*=s/(n+g+)is the equilibrium level of
14、the capital-output ratio)g(ns/)(1)g(tt42Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.13-Convergence of the Capital-Output Ratio to Its Steady-State Value43Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Steady-State Growth Equilibrium When the capi
15、tal-output ratio(t)is at its steady state value(*)output per worker g(yt)is growing at proportional rate gcapital stock per worker is growing at the same proportional rate gthe economy wide capital stock is growing at the proportional rate n+greal GDP is also growing at proportional rate n+g44Copyri
16、ght 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Steady-State Growth Path When the capital-output ratio is at its equilibrium value(*),the economy is on its steady-state growth path From Chapter 3,we know that as long as we are on the steady-state growth pathttttE*Egns)/L(Y1145Copyright
17、 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.14-Calculating Steady-StateOutput per Worker along theSteady-State Growth Path46Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Steady-State Growth Path An increase in the capital-output ratio increases the capit
18、al stock directly and indirectlyextra output generated by new capital is source for additional saving and investment This leads to a multiplier effect of anything that raises*47Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.16-The Growth Multiplier:The Effect of Increas
19、ing the Capital-Output Ratio on the Steady-State Output per Worker48Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Steady-State Growth Path Let the growth multiplier()equal/1-Output per worker along the steady-state growth path will betttE*LY49Copyright 2002 by The McGraw-Hill C
20、ompanies,Inc.All rights reserved.Steady-State Growth Path To calculate output per worker when the economy is on its steady-state growth pathcalculate the steady-state capital-output ratio*=s/(n+g+)amplify the steady-state capital-output ratio(*)by the growth multiplier=/(1-)multiply by the current v
21、alue of the efficiency of labor(Et)50Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.15-Output per Worker on the Steady-State Growth Path51Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Reaching the Steady-State Growth Path How long does it take for
22、the capital-output ratio to adjust to its steady-state value(*)?an economy that is not on its steady-state growth path will close a fraction(1-)(n+g+)of the gap between the steady state value(*)and its current value(t)in a year52Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Fig
23、ure 4.17-West German Convergence to Its Steady-State Growth Path53Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Labor Force Growth The faster the growth of the labor force,the lower will be the economys steady-state capital-output ratiothe larger the share of current investment
24、 that must go to equip new workers with the capital they need A sudden,permanent increase in labor force growth will lower output per worker on the steady-state growth path54Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.18-Labor Force Growth andGDP-per-Worker Levels55C
25、opyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.19-Effects of a Rise in Population Growth on the Economys Growth Path56Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Increases in the Depreciation Rate The higher the depreciation rate,the lower will be
26、 the economys steady-state capital-output ratioexisting capital stock wears out and must be replaced more quickly An increase in the depreciation rate will lower output per worker on the steady-state growth path57Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Productivity Growth
27、 The faster the growth rate of productivity,the lower will be the economys steady-state capital-output ratiopast investment will be small relative to current output An increase in productivity growth will raise output per worker along the steady-state growth path58Copyright 2002 by The McGraw-Hill C
28、ompanies,Inc.All rights reserved.Increases in the Saving Rate The higher the share of real GDP devoted to saving and investment,the higher will be the economys steady-state capital-output ratiomore investment increases the amount of new capital A higher saving rate also increases output per worker a
29、long the steady-state growth path59Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 4.20-National Investment Shares and GDP-per-Worker Levels60Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Chapter Summary One principal force driving long-run growth in
30、output per worker is the set of improvements in the efficiency of labor springing from technological progress61Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Chapter Summary A second principal force driving long-run growth in output per worker are the increases in the capital st
31、ock which the average worker has at his or her disposal and which further multiplies productivity62Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Chapter Summary An economy undergoing long-run growth converges toward and settles onto an equilibrium steady-state growth path,in wh
32、ich the economys capital-output ratio is constant63Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Chapter Summary The steady-state level of the capital-output ratio is equal to the economys saving rate divided by the sum of its labor force growth rate,labor efficiency growth rate,and depreciation rate64Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.
