Chapter 10: Growth – Long run Facts of Growth From fluctuations (Short and Medium runs) to growth...
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Transcript of Chapter 10: Growth – Long run Facts of Growth From fluctuations (Short and Medium runs) to growth...
Chapter 10: Growth – Long run
• Facts of Growth
• From fluctuations (Short and Medium runs) to growth (Long run)
Characterization of three worlds (on average)
1st World: - Rich, Healthy, Educated, Happy
2nd World:- Moderate Income, Moderate Health, Moderate
Education and Moderate Happiness
3rd World:- Poor, Diseases, Low Education, Wars,
Corruption, Depression
Case of US (Real GDP in 2005 dollars)
Case of US (Real GDP per capita in 2005 dollars)
Standard of living
Question: How do we understand whether a country has a higher standard of living than some other country? E.g. China and Luxembourg
China Luxembourg
Standard of living (cont’d)
Potential candidate: GDP
Problem: China’s GDP is 121 times the GDP of Luxembourg. But standard of living in Luxembourg is much higher!
Solution: look at GDP per capita GDP per capita in Luxembourg is 18 times
higher than in China
Standard of living (cont’d)
Is GDP per capita without its problems?- Everything is much cheaper in China (including food, housing, appliances etc.)So, $6000 in China will buy more than $6000 in Luxembourg
Solution: Purchasing Power Parity (PPP)
Look at how much they can purchase with the respective per capita GDP amount.
Growth in advanced countries
Does Money lead to Happiness?
Convergence
Growth Rate of GDP Per Person since 1950 versus GDP per Person in 1950; OECD Countries
ConvergenceGrowth Rate of GDP per Person since 1960, versus GDP Per Person in 1960 (2005 dollars); 76 Countries
Growth – A primer
Did you really think you could dodge math??
Production function:
Y = F(K, N)
• CRS: doubling all factors exactly doubles output• DRS: doubling all factors results in less than a
double increase in output• IRS: doubling all factors results in more than a
double increase in output
Growth – Output per worker
𝑌𝑁
=𝐹 ( 𝐾𝑁 ,𝑁𝑁 )=𝐹 ( 𝐾𝑁 ,1)
• Y/N is output per worker• K/N is capital per worker
We would like to model growth in an economyLet’s consider the contribution of a single worker:
Growth – Output per worker
Under constant returns to scale:Decreasing marginal product of capital: Each added capital unit adds less to output than the previous unit
Growth – Output per worker
What happens when there is a shift in technology?