Slide 0Chapter 7 learning objectivesThe importance of economic growthselected poverty statisticsSlide 5Estimated effects of economic growthIncome and poverty in the world selected countries, 2000Slide 8Huge effects from tiny differencesSlide 10Slide 11The lessons of growth theoryThe Solow ModelHow Solow model is different from Chapter 3’s modelSlide 15The production functionSlide 17The national income identityThe consumption functionSaving and investmentOutput, consumption, and investmentDepreciationCapital accumulationSlide 24The equation of motion for kThe steady stateSlide 27Moving toward the steady stateSlide 29Slide 30Slide 31Slide 32A numerical exampleA numerical example, cont.Approaching the Steady State: A Numerical ExampleExercise: solve for the steady stateSolution to exercise:An increase in the saving ratePrediction:International Evidence on Investment Rates and Income per PersonThe Golden Rule: introductionThe Golden Rule Capital StockSlide 43Slide 44Use calculus to find golden ruleThe transition to the Golden Rule Steady StateStarting with too much capitalStarting with too little capitalPopulation GrowthBreak-even investmentSlide 51The Solow Model diagramThe impact of population growthSlide 54International Evidence on Population Growth and Income per PersonThe Golden Rule with Population GrowthChapter SummaryFriendly quiz #2 Write answers to the following 4 questions on a sheet of paper to hand in (each worth 1 point).Quiz answersSlide 59macroeconomics fifth editionN. Gregory MankiwPowerPoint® Slides by Ron CronovichCHAPTER SEVENEconomic Growth I macro © 2002 Worth Publishers, all rights reserved(ch. 7)Topic 4:Economic Growth I(chapter 7)CHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 2Chapter 7 learning objectivesChapter 7 learning objectivesLearn the closed economy Solow model See how a country’s standard of living depends on its saving and population growth ratesLearn how to use the “Golden Rule” to find the optimal savings rate and capital stockCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 3The importance of The importance of economic growtheconomic growthThe importance of The importance of economic growtheconomic growth…for poor countriesCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 4selected poverty statisticsselected poverty statisticsIn the poorest one-fifth of all countries,daily caloric intake is 1/3 lower than in the richest fifththe infant mortality rate is 200 per 1000 births, compared to 4 per 1000 births in the richest fifth.CHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 5selected poverty statisticsselected poverty statisticsIn Pakistan, 85% of people live on less than $2/dayOne-fourth of the poorest countries have had famines during the past 3 decades. (none of the richest countries had famines)Poverty is associated with the oppression of women and minoritiesCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 6Estimated effects of economic growthEstimated effects of economic growthA 10% increase in income is associated with a 6% decrease in infant mortalityIncome growth also reduces poverty. Example:+65%-12%1997-99-25%+76%Growth and Poverty in Indonesia1984-96change in # of persons living below poverty linechange in income per capitaCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 7Income and poverty in the world Income and poverty in the world selected countries, 2000selected countries, 20000102030405060708090100$0 $5,000 $10,000 $15,000 $20,000Income per capita in dollars% of population living on $2 per day or lessMadagascarIndiaBangladeshNepalBotswanaMexicoChileS. KoreaBrazilRussian FederationThailandPeruChinaKenyaCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 8The importance of The importance of economic growtheconomic growthThe importance of The importance of economic growtheconomic growth…for poor countries…for rich countriesCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 9Huge effects from tiny differencesHuge effects from tiny differencesIn rich countries like the U.S., if government policies or “shocks” have even a small impact on the long-run growth rate, they will have a huge impact on our standard of living in the long run…CHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 10Huge effects from tiny differencesHuge effects from tiny differences1,081.4%243.7%85.4%624.5%169.2%64.0%2.5%2.0%…100 years…50 years…25 yearspercentage increase in standard of living after…annual growth rate of income per capitaCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 11Huge effects from tiny differencesHuge effects from tiny differencesIf the annual growth rate of U.S. real GDP per capita had been just one-tenth of one percent higher during the 1990s, the U.S. would have generated an additional $449 billion of income during that decadeCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 12The lessons of growth theoryThe lessons of growth theory……can make a positive difference in can make a positive difference in the lives of hundreds of millions of the lives of hundreds of millions of people.people.These lessons help usunderstand why poor countries are poordesign policies that can help them growlearn how our own growth rate is affected by shocks and our government’s policiesCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 13The Solow ModelThe Solow Modeldue to Robert Solow,won Nobel Prize for contributions to the study of economic growtha major paradigm:–widely used in policy making–benchmark against which most recent growth theories are comparedlooks at the determinants of economic growth and the standard of living in the long runCHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 14How Solow model is different from How Solow model is different from Chapter 3’s modelChapter 3’s model1. K is no longer fixed:investment causes it to grow, depreciation causes it to shrink.2. L is no longer fixed:population growth causes it to grow. 3. The consumption function is even simpler.CHAPTER 7CHAPTER 7 Economic Growth I Economic Growth Islide 15How Solow model is different from How Solow model is different from Chapter 3’s modelChapter 3’s model4. No G or T(only to simplify presentation; we can still do fiscal policy experiments)5. Cosmetic