Chapter 6
- The Source of Economic Growth - * An economy’s output of goods and services depends on the quantities of available inputs such as capital and labour and on the productivity of those inputs * Y = AF(K, N) * Either the quantity of input must grow or productivity must improve (or both) in order to have growth * Pg 182 – equation 6.2 * Growth accounting equation is the production function written in growth rate form
Growth Accounting * Output growth can be divided into three parts: the resulting from productivity growth, increased capital inputs or increased labor inputs * Growth accounting measures empirically the relative importance of these three sources of output growth
Growth Accounting and the Productivity Slowdown * One explanation for productivity slowdown is that there has not been a slowdown at all but rather is the result of a measurement error * Another explanation is that there was a slowdown due to the large increase in oil prices that occurred in 1970’s as a result of the actions of the OPEC oil cartel * Another explanation is that the productivity slowdown may have resulted from the onset of the revolution in information technology
- Growth Dynamics: The Neoclassical Growth Model - * Growth accounting does not explain why capital and labor grow at the rates they do * The growth of capital stock is the result of the myriad saving and investment decisions of households and firms * This model is useful for examining three basic questions: What is the relationship between a nations long-run standard of living and its rate of technical progress? How does a nations rate of economic growth evolve over time? Do economic forces exist that will ultimately allow poorer counties to catch up in terms of standards of living?
Setup of the Model * We assume that the population and work force both