Economicgrowthraiseslivingstandardsandreducespoverty.

AnythingthataffectstheLRrateofeconomicgrowthwillhavehugeeffects
onlivingstandardsinthelongrun.Solowstudiedthis.Solowsmodel,Kisnolongerfixed:investmentcausesittogrow,depreciation
causesittoshrinkLisnolongerfixed:populationgrowthcausesittogrow.Also,consumptionfunctionissimpler.NoGorTProduction
Function:y=f(k)MPK:f(k+1)f(k)whenkishightheaverageworkerhasalotofcapitalalready,soincreaseproductionalittlebit
(diminishingMPK).NationalIncomeIdentity:y=c+iinperworkerterms.Consumptionfunction:c=(1s)y(perworker).Saving:yc
=sy.Investment:sy=sf(k).SteadyState/equationofmotion

: k =sf ( k )k .When k =0 itssteady state .Thisoccursat

k*calledsteadystatecapitalstock.Ifkisnotatk*itwillmovetoit.Beststeadystatehashighestc*.ProductionFunctionAggregate:
y=k^1/2.Thecanchangebasedon

.Anincreaseinthesincreasesinvestment,whichcausesktogrowtowardanewsteadystate.

Movesrightandup,newequilibrium.Highers=higherk*=higherk=highery*=higherc*.Ifyouwanttogrowmoreyouneedtosavemore.
CountrieswithhighratesofSandIwillhavehigherlevelsofcapitalandincomeperworkerLT.Thegoldenrulelevelofcapital:thesteady
statevalueofk*thatmaximizesconsumption.c*=y*i*=>f(k*)
PopulationGrowth:

k .Insteadystate,i*= k .ThisisbiggestwhereMPK= .

L/ L=n .n=growthrate.Breakeveninvestment=( +n)k,theamountofinvestmentnecessarytokeepk

constant.Equationofmotionwithpopulation k =sf ( k )(+ n)k .sf(k)istheactualinvestment.Highern=lowerk*=lowery*.

Countrieswithhigherpopgrowthwillhavelowerlevelsofcapitalandincomeperworkerinthelongrun.Howtoraisestandardofliving
inpoorcountry:increasenationalsaving(reducingbudgetdeficit)andreducepopulationgrowth.Goldenrulewithpopulationgrowth:
c*=y*i*=f(k*)( +n)k*.c*ismaximizedwhenMPK= +n.1908realGDPperpersongrew2.05%yr.Technologyprogressislabor
augmenting.Itincreaseslaborefficiencyatrateg.g=

E /E.Newproductionfunction:Y=F(K,L*E).Increasesinlaborefficiency

havethesameeffectonoutputasincreasesinlaborforce.Productionfunctionpereffectiveworker:y=f(k)Savingandinvestmentper
effectiveworker:sy=sf(k).(+n+g)k=breakeveninvestmenttech:theamountofinvestmentnecessarytokeepkconstant.Consists
of:ktoreplacedepreciatingcapitalnktoprovidecapitalfornewworkers.gktoprovidecapitalfortheneweffectiveworkerscreatedby
technologicalprogress.Themaindifferenceisthatinthesteadystate,incomeperworker/capitaisgrowingatrateginsteadofbeing
constant.TechProgressinSolow:k=sf(k)( +n+g)k.GoldenRulewithTechnology:f(k*)( +n+g)k*=c*.c*ismaximized
whenMPK= +n+gorMPK =n+g.,If(MPK)>(n+g)U.S.economyisbelowGRSSandshouldincreasesandinvestafractionof
income,toreachasteadystatewithhigherc.Solowexhibitsbalancedgrowthmanyvariablesgrowsame.n+g=growth.Solowmodel
predicts,poorcountrieswithlowerY/LandK/Lshouldgrowfasterthanrichones.Iftrue,incomegapshrinksandlivingsstandards
converge.Solowmodelreallypredictsconditionalconvergencecountriesconvergetotheirownsteadystates,whicharedeterminedby
saving,populationgrowth,andeducation.Growthempirics:Factoraccumulationvs.productionefficiency.Differencesinincomeper
capitaamongcountriescanbeduetodifferencesin1.Capitalphysicalorhumanperworker.2.Theefficiencyofproduction.Countrieswith
higherphysicalorhumancapitalperworkeralsotendtohavehigherproductionefficiency.Freetradecanincreaseproductionefficiencyand
livingstandards.Howtoincreasethesavingrate:1.reducegov.budgetdeficitorincreasebudgetsurplus2.Increaseincentiveforprivate
savingbyexpandingtaxincentiveforIRAS,replacefedincometaxwithconsumptiont.reducecapitalgainstax,etc.Solowhas1typeof
capital:intherealworldtheyhaveprivatecapitalstock,publicinfrastructure,andhumancapital.Industrialpolicy:Govtshouldactively
encourageinvestmentincapitalofcertaintypesorincertainindustries,becausetheymayhavepositiveexternalities.Encouragetech
progress:patentlaws,taxincentiveforr&D,grantstouofm,

FactsaboutBizcycle:GDPgrowthaverages33.5percentperyearoverthelongrunwithlargefluctuationsintheshortrun.Consumption
andinvestmentfluctuatewithGDP,CtendstobelessvolatilethanI.Unemploymentrisesduringrecessions.Okunslaw:thenegative
relationshipbetweenGDPandunemployment.

GDP:32( unemployment .ComponentsofLEIindex:Averageworkweek

inmanufacturing,
Initialweeklyclaimsforunemploymentinsurance,Newordersforconsumergoodsandmaterials,
Neworders,nondefensecapitalgoods,
Vendorperformance,Newbuildingpermitsissued,etc.Timehorizons:LR:pricesareflexible,respondtochangesinS&D.SR:Sticky
pricesatpredeterminedlevel.Outputisdeterminedbysupply&techY=F(K,L).Changesindemandforgoods&services(C,I,G)only
affectprices,notquantities.Outputandemploymentdependondemand,whichisaffectedbyfiscal(G&T),Monetarypolicy(M)andCor
I.MAD&S:stabilizeeconomy,showshowPandOaredetermined,ST&LTbehaviordiffer.ADCurve:showsrelationbetweenPandQof
outputdemanded.MV=PY,inverserelationshipbetweenP&Y.Increaseinpricescauserealmoney(M/P)tofallwhichdecreases
demand.IncreaseinMshiftsADRight.LRASCurveisvertical.FullEmploy:unemployment=naturalrate.LReffectsofincreaseM:
ADshiftsright,priceup,outputsame.SRASCurve:horizontalbecausePisfixed.SReffectsofincreaseinM:ADshiftsright,pricestays,
outputincrease.Shocks:exogenouschangesinagg.SorD.theytemp.pusheconomyawayfromfullemployment.NegativeeffectofDS:
velocitydecreaseADleftSR,pricedowninLR.ShockAS:altersproductioncost,affectspricecharged.Adverse:drought,higherprice,
strike,regulation,shiftSRASup.Stabilization:reduceSReconomicfluctuation.Canbedonebymonetarypolicy(increaseM),openmkt
ops,changeRR,lowerdiscountrate.Also,withfiscalpolicy,govexpendituremultiplier,taxesmult.
Exports9%GDPImports14%.Spendingdoesntneedto=outputandSdoesntneedto=Iinopeneconomy.Imports:spendingonforeign
goods,Cf+If+Gf.Exports=foreignspendingondomestic.NX=Y(C+I+G).C+I+G=domesticspending.Tradesurplus:E>I.
Deficit:I>E.NX=SInetcapitaloutflowofloanablefunds/netpurchasesofforeignassets.S>Ilenderabroad,S<Iborrowerfromabroad
inflow.PF:=F(K,)CF:C=C(YT)IF:I=I(r)G=GbarT=Tbar.Supplyofloanable:S=YC(YT)G.I(R)isdownwardsloping,
S=vertical.FiscalPolicyAbroad:expansionraisesworldr*,movementalongcurve.IncreaseinInvestmentDemandleadstotradedeficit
couldbebecauseoftaxbreak.e=nominalexchangerate.(yenperdollar).
foreign.

=realexchange(JapBigMacforUSBigmac)domesticfor

=((e*p)/p*)unitsofJapforUSgoods.Highexchangeratemeansforeigngoodscheap.NX( =I(r*).I(r*)indep.of

andvertical.Fiscalpolicyhome:IncreaseinGshiftssupplyleft, up,NXdown.Increaseinr*,supplyright, down,

andNXright.TradepolicyrestrictIM:demandcurveright,

goesupandNXsame.e= *P*/P.%e=% + .PPP:

goodsmustsellatthesamepriceinallcountriesbecauseofarbitragelawofoneprice.Formula:exP=P*.PPPnotlikelycauseinternational
arbitragenotpossible,notperfectsubs.