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MACROECONOMICS
SIXTH EDITION
N. GREGORY MANKIW
PowerPoint Slides by Ron Cronovich
2007 Worth Publishers, all rights reserved
about policies to promote growth about growth empirics: confronting the theory
with facts
CHAPTER 8
Economic Growth II
slide 1
Introduction
In the Solow model of Chapter 7, the production technology is held constant.
CHAPTER 8
slide 2
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Assume:
Technological progress is labor-augmenting: it increases labor efficiency at the exogenous rate g:
CHAPTER 8
Economic Growth II
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Y F (K , L E )
where L E = the number of effective
workers. Increases in labor efficiency have the same effect on output as increases in the labor force.
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Economic Growth II
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Notation:
y = Y/LE = output per effective worker k = K/LE = capital per effective worker
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k to replace depreciating capital n k to provide capital for new workers g k to provide capital for the new effective
workers created by technological progress
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k = s f(k) ( +n +g)k
( +n +g ) k
sf(k)
k*
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Total output
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Y = yEL
n+g
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This is true in the real world. Solow model predicts real wage grows at same
rate as Y/L, while real rental price is constant.
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Studies: both factors are important. the two factors are correlated: countries with
higher physical or human capital per worker also tend to have higher production efficiency.
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developing nations
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4.5%
0.7%
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Policy issues
Are we saving enough? Too much?
What policies might change the saving rate? How should we allocate our investment between
privately owned physical capital, public infrastructure, and human capital?
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If (MPK ) > (n + g ),
U.S. is below the Golden Rule steady state and should increase s.
If (MPK ) < (n + g ),
U.S. economy is above the Golden Rule steady state and should reduce s.
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To determine , divide 2 by 1:
k 0.1y k 2.5 y
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0.3 y 2.5 y
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Thus,
Conclusion:
The U.S. is below the Golden Rule steady state: Increasing the U.S. saving rate would increase consumption per capita in the long run.
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Increase incentives for private saving: reduce capital gains tax, corporate income tax,
estate tax as they discourage saving. replace federal income tax with a consumption tax. expand tax incentives for IRAs (individual retirement accounts) and other retirement savings accounts.
CHAPTER 8
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private capital stock public infrastructure human capital: the knowledge and skills that
workers acquire through education.
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Legal institutions, to protect property rights. Capital markets, to help financial capital flow to
the best investment projects.
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Patent laws:
encourage innovation by granting temporary monopolies to inventors of new products.
Tax incentives for R&D Grants to fund basic research at universities Industrial policy:
encourages specific industries that are key for rapid tech. progress
(subject to the preceding concerns).
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Economic Growth II
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CASE STUDY:
Italy
Japan U.K. U.S.
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4.9
8.2 2.4 2.2
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2.3
2.6 1.8 1.5
slide 31
Measurement problems:
Productivity increases not fully measured.
Oil prices:
Oil shocks occurred about when productivity slowdown began.
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Worker quality:
1970s - large influx of new entrants into labor force (baby boomers, women). New workers tend to be less productive than experienced workers.
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All of them are plausible, but its difficult to prove that any one of them is guilty.
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CASE STUDY:
Germany
Italy Japan U.K. U.S.
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5.7
4.9 8.2 2.4 2.2
2.0
2.3 2.6 1.8 1.5
1.2
1.5 1.2 2.5 2.2
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CASE STUDY:
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A basic model
Production function: Y = A K
where A is the amount of output for each unit of capital (A is exogenous & constant)
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A basic model
K = s Y K
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A two-sector model
Two sectors:
manufacturing firms produce goods. research universities produce knowledge that
increases labor efficiency in manufacturing.
Mfg prod func: Y = F [K, (1-u )E L] Res prod func: E = g (u )E Cap accumulation: K = s Y K
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A two-sector model
Key variables:
s: affects the level of income, but not its growth rate (same as in Solow model) u: affects level and growth rate of income
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Patents create a stream of monopoly profits. Extra profit from being first on the market with a
new product.
3. Innovation produces externalities that reduce the cost of subsequent innovation.
Much of the new endogenous growth theory attempts to incorporate these facts into models to better understand technological progress.
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Estimates:
Social return to R&D 40% per year.
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Chapter Summary
1. Key results from Solow model with tech progress steady state growth rate of income per person depends solely on the exogenous rate of tech progress the U.S. has much less capital than the Golden Rule steady state 2. Ways to increase the saving rate increase public saving (reduce budget deficit) tax incentives for private saving
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Chapter Summary
3. Productivity slowdown & new economy Early 1970s: productivity growth fell in the U.S. and other countries. Mid 1990s: productivity growth increased, probably because of advances in I.T.
4. Empirical studies Solow model explains balanced growth, conditional convergence Cross-country variation in living standards is due to differences in cap. accumulation and in production efficiency
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Chapter Summary
5. Endogenous growth theory: Models that examine the determinants of the rate of tech. progress, which Solow takes as given. explain decisions that determine the creation of knowledge through R&D.
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