1macroeconomicsfifth editionN. Gregory MankiwPowerPoint®Slides by Ron Cronovichmacro © 2002 Worth Publishers, all rights reservedTopic 5:Economic Growth II(Chapter 8)CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 1Learning 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 IIEconomic Growth IIslide 2IntroductionIntroductionIn 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)2CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 3Examples 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 IIEconomic Growth IIslide 4Tech. progress in the Tech. progress in the SolowSolow modelmodel§ 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 IIEconomic Growth IIslide 5Tech. progress in the Tech. progress in the SolowSolow modelmodel§ 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. (,)YFKLE=×3CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 6Tech. progress in the Tech. progress in the SolowSolow modelmodel§ 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 IIEconomic Growth IIslide 7Tech. progress in the Tech. progress in the SolowSolow modelmodel___________ = 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 IIEconomic Growth IIslide 8Tech. progress in the Tech. progress in the SolowSolow modelmodelInvestment, break -even investmentCapital per worker, k__________________4CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 9SteadySteady--State Growth Rates in the State Growth Rates in the SolowSolow Model with Tech. ProgressModel 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 IIEconomic Growth IIslide 10The 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 = δ + n + gor 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 __________________________________________.____________.CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 11Policies 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?5CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 121. 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 − δ ) to (n + g ). § If (MPK − δ ) > (n + g ), then we are _____ the Golden Rule steady state and should _______ s. § If (MPK − δ ) < (n + g ), then we are _____ the Golden Rule steady state and should _______ s.CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 131. Evaluating the Rate of Saving1. Evaluating the Rate of SavingTo estimate (MPK − δ ), we use three facts about the U.S. economy:1. k = 2.5yThe capital stock is about 2.5 times one year’s GDP.2. δ k = 0.1yAbout 10% of GDP is used to replace depreciating capital.3. MPK × k = 0.3yCapital income is about 30% of GDPCHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 141. Evaluating the Rate of Saving1. Evaluating the Rate of Saving1. k = 2.5 y2. δ k = 0.1 y3. MPK × k = 0.3 y____________0100425...δ ==⇒To determine δ , divided 2 by 1:6CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 151. Evaluating the Rate of Saving1. Evaluating the Rate of Saving1. k = 2.5 y2. δ k = 0.1 y3. MPK × k = 0.3 y______________03MPK01225...==⇒To determine MPK, divided 3 by 1:Hence, MPK − δ = 0.12 − 0.04 = 0.08CHAPTER 8CHAPTER 8 Economic Growth IIEconomic Growth IIslide 161. Evaluating the Rate of Saving1. Evaluating the Rate of Saving§ From the last slide: MPK − δ = 0.08§ U.S. real GDP grows an average of 3%/year, so n + g = 0.03§ Thus, in the U.S.,MPK − δ = 0.08 > 0.03 = n + g§ Conclusion: The U.S. is _____ the Golden Rule steady state: The U.S. is _____ the Golden Rule steady state: if we _______ our saving rate, we will have faster if we _______ our saving rate, we will have faster growth until we get to a new steady state with growth until we get to a new steady state with higher consumption per capita.higher consumption per capita.CHAPTER 8CHAPTER 8 Economic Growth