Economics Chapter 3

Chapter3
Introduction to Economic Growth
Macroeconomics Chapter
Economic Growth
and Standard of Living
World Distribution of Real GDP
World Distribution of Per Capita

income in 2000
World Distribution of Per Capita
Income in 1960
Growth Rate in Per capita Income
1960-2000.
Income Inequality.
Long Term Economic Growth in OECD Countries
Productivity Slowdown
The decline in the growth rate of

real GDP per person from 3.1% per
year for 19601980 to 1.8% per
year for 19802000 is sometimes
called the productivity slowdown.
10
Growth Questions
What factors caused some countries to

grow fast and others to grow slow over
periods such as 1960 to 2000?
In particular, why did the East Asian

countries do so much better than the subSaharan African countries?
11
Growth Questions
How did countries such as the United

States and other OECD members sustain
growth rates of real GDP per person of
around 2% per year for a century or
more?
12
Growth Questions
What can policymakers do to increase

growth rates of real GDP per person?
13
Production Function
Y = A F(K, L)
A
Technology Level
Capital Stock machines and

buildings used by business.
Labor Force number of workers
14
15
16
Production Functions
MPL Marginal Product of Labor

Diminishing
Marginal Product of labor
MPK Marginal Product of Capital

Diminishing
Marginal Product of Capital
17
Constant Returns to Scale
Constant Returns to Scale

Double
K and L and Y will also double
Therefore, if we multiply K and L by

the quantity 1/L we also multiply Y
by 1/L to get
Y/L = A F(K/L, L/L)

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Per Worker Production Function
y=f(k)
y
output per worker

k capital per worker
19
20
An example:
Cobb-Douglas Production Function
Y AK L1
Y
K
y
k
L
L
AK L1
y
AK L Ak
L
dY
MPK
AK 1 L1 AK L1 / K Y / K
dK
MPK K / Y
21
Contributions to GDP Growth
Y/Y = A/A + (K/K) + (L/L)
The growth rate of real GDP, Y/Y, equals

the growth rate of technology, A/A, plus
the contributions from the growth of
capital, (K/K), and labor, (L/L).
Solow residual
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Contributions to GDP Growth
+=1
Share of capital income () + share of labor income () = 1
Y/Y = A/A + (K/K) + (L/L)

0 < < 1
0 < < 1
23
Solow Growth Model
Model ignores:
Government
No taxes, public expenditures, debt, or

money
International
Trade
No trade in goods or financial assets
24
Solow Growth Model
Labor force, L = ( labor force/

population) population
Labor-force
participation rate
Assume labor force participation rate is
constant.
Labor force growth rate is the
population growth rate
25
Solow Growth Model
Growth rate in population

We
assume that population grows at a

constant rate, denoted by n, where n is
a positive number (n > 0).
L/L = n
26
Solow Growth Model
27
Solow Growth Model
Assume A/A = 0
Y/Y= (K/K) + (1)(L/L)
The growth rate of real GDP is a

weighted average of the growth
rates of capital and labor.
28
Solow Growth Model
From the per worker production

function
y/y
= Y/Y L/L
k/k
= K/K L/L
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Solow Growth Model

Y/Y= (K/K) + (1)(L/L)
Y/Y= (K/K) (L/ L) + L/ L
Y/Y L/L = (K/K L/L)
y/y = (k/k)
30
Solow Growth Model
Each household divides up its real income

in a fixed proportion s to saving and 1 s
to consumption ( C ).
Capital depreciate at the same constant
rate
K is the amount of capital that depreciates
each year
31
Solow Growth Model
Real saving = s (Y K)
Real saving = (saving rate) (real

income)
32
Solow Growth Model
YK=C+s(Y K)
Real income = consumption + real saving
33
Solow Growth Model
Y=C+I
Real GDP = consumption + gross
investment
YK = C + (IK)
Real NDP = consumption + net
investment
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Solow Growth Model
C+s(YK) = C+IK
or
s(YK) = IK
Real saving = net investment
35
Solow Growth Model
K = IK
Change in capital stock = gross investment

depreciation,
or
Change in capital stock = net investment
K = s(YK)
Change in capital stock = real saving
36
Solow Growth Model
Divide both sides by K
K/K = sY/K s
37
Solow Growth Model
k/k = K/K L/L
k/k = s (Y/K) s n
38
Solow Growth Model
Y/K =(Y/L) / (K/L)
Y/K = y/k
39
Solow Growth Model
k/k = s(y/k) s n
y/y = (k/k)
y/y = [ s(y/k) s n]
40
Solow Growth Model
41
Solow Growth Model
42
Solow Growth Model
steady state.
When
k = k, k/k equals zero.

k/k = 0, k stays fixed at the value k.
y* = f(k*)
43
Solow Growth Model
44
Solow Growth Model
In the steady state, k/k equals zero.

s(y*/k*) s n= 0
s(y* k*) = nk*
Steady-state saving per worker = steadystate capital provided for each new worker
45

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Chapter3

Introduction to Economic Growth

World Distribution of Real GDP

World Distribution of Per Capita

Long Term Economic Growth in OECD Countries

The decline in the growth rate of

What factors caused some countries to

In particular, why did the East Asian

How did countries such as the United

What can policymakers do to increase

Capital Stock machines and

Labor Force number of workers

MPL Marginal Product of Labor

Marginal Product of labor

MPK Marginal Product of Capital

Marginal Product of Capital

Constant Returns to Scale

Constant Returns to Scale

K and L and Y will also double

Therefore, if we multiply K and L by

Y/L = A F(K/L, L/L)

Per Worker Production Function

output per worker

Contributions to GDP Growth

Y/Y = A/A + (K/K) + (L/L)

The growth rate of real GDP, Y/Y, equals

Contributions to GDP Growth

Y/Y = A/A + (K/K) + (L/L)

Solow Growth Model

No taxes, public expenditures, debt, or

No trade in goods or financial assets

Solow Growth Model

Labor force, L = ( labor force/

Solow Growth Model

Growth rate in population

assume that population grows at a

Solow Growth Model

Solow Growth Model

Y/Y= (K/K) + (1)(L/L)

The growth rate of real GDP is a

Solow Growth Model

From the per worker production

Solow Growth Model

Y/Y= (K/K) (L/ L) + L/ L

Y/Y L/L = (K/K L/L)

Solow Growth Model

Each household divides up its real income

Solow Growth Model

Real saving = (saving rate) (real

Solow Growth Model

Solow Growth Model

Solow Growth Model

Solow Growth Model

Change in capital stock = gross investment

Solow Growth Model

Divide both sides by K

Solow Growth Model

k/k = K/K L/L

Solow Growth Model

Y/K =(Y/L) / (K/L)

Solow Growth Model

Solow Growth Model

Solow Growth Model

s(y* k) = nk