Slide 0Learning objectivesIntroductionExamples of technological progressTech. progress in the Solow modelSlide 6Slide 7Slide 8Slide 9Steady-State Growth Rates in the Solow Model with Tech. ProgressThe Golden RulePolicies to promote growth1. Evaluating the Rate of SavingSlide 14Slide 15Slide 16Slide 172. Policies to increase the saving rate3. Allocating the economy’s investmentAllocating the economy’s investment: two viewpointsPossible problems with industrial policy4. Encouraging technological progressCASE STUDY: The Productivity SlowdownExplanations?Slide 25The bottom line:CASE STUDY: I.T. and the “new economy”Slide 28Growth empirics: Confronting the Solow model with the factsConvergenceSlide 31Chapter summarySlide 33macroeconomics fifth editionN. Gregory MankiwPowerPoint® Slides by Ron Cronovichmacro © 2002 Worth Publishers, all rights reservedTopic 5:Economic Growth II(Chapter 8)CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 2Learning objectivesLearning objectivesTechnological progress in the Solow modelPolicies to promote growthGrowth empirics: Confronting the theory with factsEndogenous growth: (covered in section)CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 3IntroductionIntroductionIn the Solow model of Chapter 7, __________________________________________________________________Neither point is true in the real world:1929-2001: U.S. real GDP per person grew by a factor of 4.8, or 2.2% per year. examples of technological progress abound(see next slide)CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 4Examples of technological progressExamples of technological progress1970: 50,000 computers in the world2000: 51% of U.S. households have 1 or more computersThe real price of computer power has fallen an average of 30% per year over the past three decades.The average car built in 1996 contained more computer processing power than the first lunar landing craft in 1969.Modems are 22 times faster today than two decades ago.Since 1980, semiconductor usage per unit of GDP has increased by a factor of 3500.1981: 213 computers connected to the Internet2000: 60 million computers connected to the InternetCHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 5Tech. progress in the Solow modelTech. progress in the Solow modelA new variable: E = ____________Assume: Technological progress is labor-augmenting: it increases labor efficiency at the exogenous rate g: =g _ _ _ _ _CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 6Tech. progress in the Solow modelTech. progress in the Solow modelWe now write the production function as:where L  E = the number of ________________________. –Hence, increases in labor efficiency have the same effect on output as increases in the labor force. ( , )Y F K L E= �CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 7Tech. progress in the Solow modelTech. progress in the Solow modelNotation: y = ____ = ____________________ k = ____ = ____________________ Production function per effective worker:y = f(k)Saving and investment per effective worker:s y = s f(k)CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 8Tech. progress in the Solow modelTech. progress in the Solow model___________ = break-even investment: the amount of investment necessary to keep k constant. Consists of:__ to replace depreciating capital__ to provide capital for new workers__ to provide capital for the new “effective” workers created by technological progressCHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 9Tech. progress in the Solow modelTech. progress in the Solow modelInvestment, break-even investmentCapital per worker, k __________________CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 10Steady-State Growth Rates in the Steady-State Growth Rates in the Solow Model with Tech. ProgressSolow Model with Tech. ProgressY = y E L Total output(Y/ L ) = y E Output per workery = Y/ (L E )Output per effective workerk = K/ (L E )Capital per effective workerSteady-state growth rateSymbolVariableCHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 11The Golden RuleThe Golden RuleTo find the Golden Rule capital stock, express c* in terms of k*:c* = y*  i*= f (k* )  _________ c* is maximized when MPK =  + n + g or equivalently, ______________ In the Golden In the Golden Rule Steady State, Rule Steady State, the marginal the marginal product of capital product of capital net of depreciation net of depreciation equals the equals the pop. growth rate pop. growth rate __________________________________________.____________.In the Golden In the Golden Rule Steady State, Rule Steady State, the marginal the marginal product of capital product of capital net of depreciation net of depreciation equals the equals the pop. growth rate pop. growth rate __________________________________________.____________.CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 12Policies to promote growthPolicies to promote growthFour policy questions:1. Are we saving enough? Too much? 2. What policies might change the saving rate? 3. How should we allocate our investment between privately owned physical capital, public infrastructure, and “human capital”?4. What policies might encourage faster technological progress?CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 131. Evaluating the Rate of Saving1. Evaluating the Rate of SavingUse the Golden Rule to determine whether our saving rate and capital stock are too high, too low, or about right. To do this, we need to compare (MPK   ) to (n + g ). If (MPK   ) > (n + g ), then we are _____ the Golden Rule steady state and should _______ s. If (MPK   ) < (n + g ), then we are _____ the Golden Rule steady state and should _______ s.CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth IIslide 141. Evaluating the Rate of Saving1. Evaluating the Rate of SavingTo estimate (MPK   ), we use three facts about the U.S. economy:1. k = 2.5 yThe capital stock is about 2.5 times one year’s GDP.2. k = 0.1 yAbout 10% of GDP is used to replace depreciating capital.3. MPK  k = 0.3 yCapital income is about 30% of GDPCHAPTER 8CHAPTER 8 Economic Growth II Economic Growth