Economic growth

Danica Popović, December 4, 2007

"Then a policy-maker was heard to say, "Forget grand optimality. Solovians are a simple people. We need a simple policy...If we make investment a constant proportion of output, our search for the ideal investment policy reduces to finding the best value of s, the fixed investment ratio." "It's fair," Solovians all said. The King agreed. So he established a prize for discovery of the optimum investment ratio."

(Edmund S. Phelps, "Golden Rule of Accumulation", American Economic Review, 1961)

________________________________________________________ http://cepa.newschool.edu/~het/essays/growth/optimal/

goldengr.htm

Why?

Another three SFs

Average hourly earnings & the CPIAverage hourly earnings & the CPI, 1964-2004

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Consumer Price Index

Average hourly earnings (nominal)

The capital-labour ratio stops changing when investment is equal to depreciation.

When not at point A, the economy moves towards its steady state.

The steady state is one in which Δk = 0,

Edmund Phelps acquired an international reputation through his work on the golden rule of capital accumulation (he was 28). This concept now appears in the toolbox of every economist, is taught in all classes on growth, and serves as a reference in all works on the macro economy

the capital accumulation line is now δ+a+n, where a is the rate of technological progress.

The steady state is occurs when investment is equal to (δ+a+n)k.

This occurs at point A, the intersection between the saving schedule sf(k) and the capital widening line (δ+a+n)k.

At the steady-state k, output and capital increase at rate a+n, while GDP per capita increases at rate a.

Return to the list of the stylized facts and check them against these implications of this model.

One of the main points of Table 3.4 is that the numbers of the population and the numbers of employed have grown at roughly the same rates over the course of the twentieth century for these countries, meaning that many trends (people entering the labour force later, retiring earlier, living longer and increased participation in the labour market by women) have more or less offset each other as far as the numbers of workers are concerned. However the other main point is to see that the reduction in hours per employee has more than offset the growth in employment.

Burda and Wyplosz register some surprise that the 1990s did not generally show a major improvement in the contribution of technological progress (exceptions being Germany and the US where the residuals are larger in Table 3.5(c) than in 3.5(b)).

Endogenous growth

Romer, Lucas, King and Rebelo, and other scholars have developed models in which steady growth can be generated endogenously—i.e., can occur without any exogenous technical progress—at rates that may depend upon taste and technology parameters and also tax policy.

Two caveats never-ending growth requires never-ending

increases in human capital The second logical difficulty of the

endogenous growth approach is the assumption of precisely constant returns to scale in the crucial production process. In the Lucas-Rebelo model, for instance, the sum of the exponents on physical and human capital must equal 1.00 exactly for steady-state growth to be implied; if this sum equals 0.99 instead, then the economy will approach a steady state in which there is no growth in the per capita quantities.