Lecutre 12 Traditional Growth TheoryProduction Function-Focus on capital-CharacteristicsImplications-Steady state-ConvergenceTechnology-Source?Chuck NolandCoconut per week: GDPat sometime there’s no incentive to build a ladderwhen he stop building a ladder, econ growth stopsTraditional Growth Theory (Robert Solow: diminishing investment return)natural resources: landresources are the source of growthFocus on capitalGive your workers more tools, will increase output per workerWealthy have more capital goodsInvestment and Growth are correlatedmore investment growth rate, more GDP growth ratecorrelation vs causationProduction functionreal GDp capitalMarginal product: change in output from a change in an input, everything else heldconstantMarket Capital>0*Key characteristics:Diminishing returns-Declining Marginal ProductK2: Steady state: don’t want to build any more capitalNo change in capitalno net investment, not “no investment”net investment: investment minus depreciationno growth!!sad, stagnant stateConvergence: Rich stop growing; poor catch upGreater returns to investment in poor nationssteady state—convergenceresume growth, get out of the steady state: build a ladderSource of new growth=technology F1 F0Y=A*F(capital, labor, land)Put cow on sand, they produce more milkTechnology (where Robert Solow went wrong):How do economies get new technology?Exogenous technology shocks as
View Full Document
Unlocking...