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C h a p t e r 3 Introduction to Economic Growth

C h a p t e r 3 Introduction to Economic Growth. 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 cpita Income 1960-2000. Income Inequality.

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C h a p t e r 3 Introduction to Economic Growth

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  1. C h a p t e r 3 Introduction to Economic Growth Macroeconomics - Barro Chapter 3

  2. Economic Growth and Standard of Living Macroeconomics - Barro Chapter 3

  3. 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 cpita Income 1960-2000. • Income Inequality. Macroeconomics - Barro Chapter 3

  4. Macroeconomics - Barro Chapter 3

  5. Macroeconomics - Barro Chapter 3

  6. Macroeconomics - Barro Chapter 3

  7. Macroeconomics - Barro Chapter 3

  8. Long Term Economic Growth in OECD Countries Macroeconomics - Barro Chapter 3

  9. Productivity Slowdown • The decline in the growth rate of real GDP per person from 3.1% per year for 1960–1980 to 1.8% per year for 1980–2000 is sometimes called the productivity slowdown. Macroeconomics - Barro Chapter 3

  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 sub-Saharan African countries? • 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? • What can policymakers do to increase growth rates of real GDP per person? Macroeconomics - Barro Chapter 3

  11. Production Function Y = A· F(K, L) • A  Technology Level • K  Capital Stock – machines and buildings used by business. • L  Labor Force – number of workers Macroeconomics - Barro Chapter 3

  12. Macroeconomics - Barro Chapter 3

  13. Macroeconomics - Barro Chapter 3

  14. Production Functions • MPL – Marginal Product of Labor • Diminishing Marginal Product of labor • MPK – Marginal Product of Capital • Diminishing Marginal Product of Capital Macroeconomics - Barro Chapter 3

  15. Contributions to GDP Growth • ∆Y/Y = ∆A/ A + α·(∆K/K) + β·(∆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, α·(∆K/K), and labor, β ·(∆L/L). Macroeconomics - Barro Chapter 3

  16. 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 Macroeconomics - Barro Chapter 3

  17. Solow Growth Model • Model ignores: • Government • No taxes, public expenditures, debt, or money • International Trade • No trade in goods or financial assets Macroeconomics - Barro Chapter 3

  18. 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 δ • δK is the amount of capital that depreciates each year Macroeconomics - Barro Chapter 3

  19. Solow Growth Model • Additions to the K stock: • Real saving = s · (Y − δK) • Real saving = saving rate· real income Macroeconomics - Barro Chapter 3

  20. Solow Growth Model • ∆K = I − δ K • Change in capital stock = gross investment − depreciation, or • Change in capital stock = net investment • ∆K = I − δ K = s· ( Y− δ K) • Change in capital stock = net investment = real saving Macroeconomics - Barro Chapter 3

  21. Solow Growth Model • Divide both sides by K • ∆K/K = s·Y/K − sδ Macroeconomics - Barro Chapter 3

  22. 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 Macroeconomics - Barro Chapter 3

  23. Solow Growth Model • ∆k/k = ∆K/K − ∆L/L • ∆k/k = s· (Y/ K) − sδ − n Macroeconomics - Barro Chapter 3

  24. Solow Growth Model • ∆k/k = s·(y/k) − sδ − n • ∆y/y = α·(∆k/k) • ∆y/y = α·[ s·( y/k) − sδ − n] Macroeconomics - Barro Chapter 3

  25. Solow Growth Model Macroeconomics - Barro Chapter 3

  26. 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*) Macroeconomics - Barro Chapter 3

  27. Solow Growth Model Macroeconomics - Barro Chapter 3

  28. Solow Growth Model • In the steady state, ∆k/k equals zero. • s· ( y*/ k*) − sδ − n= 0 • s·( y* − δ k*) = nk* • Steady-state saving per worker = steady-state capital provided for each new worker Macroeconomics - Barro Chapter 3

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