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macroeconomicsfifth edition

N. Gregory Mankiw

PowerPointSlides

by Ron Cronovich

macro

2002 Worth Publishers, all rights reserved

CHAPTER EIGHT

Economic Growth II

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m

CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 2

Learning objectie!Learning objectie!

Technological progress in the Solowmodel

Policies to promote growth

Growth empirics:Confronting the theory with facts

Endogenous growth:

Two simple models in which the rateof technological progress isendogenous

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 3

Intro"#ctionIntro"#ction

In the Solow model of Chapter 7, the production technology is held constant

income per capita is constant in the steadystate.

either point is true in the real world:

!"#"$#%%!: &.S. real G'P per person grew(y a factor of ).*, or #.#+ per year.

eamples of technological progress a(ound

(see next slide)

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 4

Examples of technological progressExamples of technological progress

!"7%: -%,%%% computers in the world

#%%%: -!+ of &.S. households hae ! or more computers

The real price of computer power has fallen an aerage of

/%+ per year oer the past three decades.

The aerage car (uilt in !""0 contained more computer

processing power than the 1rst lunar landing craft in !"0".

2odems are ## times faster today than two decades ago.

Since !"*%, semiconductor usage per unit of G'P has

increased (y a factor of /-%%.

!"*!: #!/ computers connected to the Internet#%%%: 0% million computers connected to the Internet

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 5

Tech. $rogre!! in the %o&ow mo"e&Tech. $rogre!! in the %o&ow mo"e&

3 new aria(le: E4 la(or e5ciency

3ssume:

Technological progress is labor-

augmenting: it increases la(ore5ciency at the eogenous rate g:

Eg

E

=

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide

Tech. $rogre!! in the %o&ow mo"e&Tech. $rogre!! in the %o&ow mo"e&

6e now write the production function as:

where LE 4 the num(er of eectiewor8ers.9 ence, increases in la(or e5ciency

hae the same eect on output as

increases in the la(or force.

; ,

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Tech. $rogre!! in the %o&ow mo"e&Tech. $rogre!! in the %o&ow mo"e&

otation: y4 Y/LE 4 output per eectie wor8er

k4 K/LE 4 capital per eectie wor8er

Production function per eectie wor8er:

y 4 f(k)

Saing and inestment per eectie wor8er:

s y 4 s f(k)

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Tech. $rogre!! in the %o&ow mo"e&Tech. $rogre!! in the %o&ow mo"e&

; =n =geectie? wor8ers created (y

technological progress

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide #

Tech. $rogre!! in the %o&ow mo"e&Tech. $rogre!! in the %o&ow mo"e&

Investment$brea%&even

investment

Ca'ital 'er

wor%er$ k

sf(k)

; =n=g

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide ()

%tea"y'%tate Growth Rate! in the%tea"y'%tate Growth Rate! in the%o&ow Mo"e& with Tech. Progre!!%o&ow Mo"e& with Tech. Progre!!

n= gY4yE LTotal output

g;Y/L< 4yE@utput perwor8er

%y4Y/;LE pic8winners? ;choose industries with the

highest return to capital or (iggest

eternalities

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 22

. Enco#raging techno&ogica& $rogre!!. Enco#raging techno&ogica& $rogre!!

Patent laws:encourage innoation (y grantingtemporary monopolies to inentors of newproducts

Ta incenties for BM' Grants to fund (asic research at uniersities

Industrial policy:encourage speci1c industries that are 8eyfor rapid tech. progress(subject to the concerns on the preceding slide)

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 23

CA%E %T/01-CA%E %T/01-

The Pro"#ctiity %&ow"ownThe Pro"#ctiity %&ow"own

!.-

!.*#.0

#./

#.%

!.0

!.*

#.#

#.)*.#

)."

-.7

)./

#."

!"7#$"-!")*$7#

&.S.

&.D.Napan

Italy

Germany

France

Canada

Growth in output per person;percent per yearother things? arenJt eual. In samples of countries with similar saings

M pop. growth rates,income gaps shrin8 a(out #+Kyear.

In larger samples, if one controls for dierences

in saing, population growth, and human capital,incomes conerge (y a(out #+Kyear.

6hat the Solow model reallypredicts isconditional convergence$ countries conergeto their own steady states, which are determined(y saing, population growth, and education.3nd this prediction comes true in the real world.

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 32

4actor acc#m#&ation !.4actor acc#m#&ation !.Pro"#ction e))iciencyPro"#ction e))iciency

Two reasons why income per capita arelower in some countries than others:

!. 'ierences in capital ;physical or humanengine

of growth.? ere, the permanent growth rate

depends on s. In Solow model, it doesnot.

'iide through (y K and use Y 4AK,get:

0 it & h "i i i hi t

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 3!

0oe! ca$ita& hae "imini!hing ret#rn!0oe! ca$ita& hae "imini!hing ret#rn!or not5or not5

es, if >capital? is narrowly de1ned;plant M euipmentcapital? ;physical M human capital,

8nowledge

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CHAPTER 8CHAPTER 8 Economic Growth II Economic Growth II slide 3"

A two'!ector mo"e&A two'!ector mo"e&

Two sectors:9 manufacturing1rms produce goods9 researchuniersities produce 8nowledge

that increases la(or e5ciency inmanufacturing

u4 fraction of la(or in research;u is eogenous