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ECON 2006--Chapter 12, Growth Theory

by: Shannon Cummins

ECON 2006--Chapter 12, Growth Theory ECON 2006

Shannon Cummins
Virginia Tech
GPA 3.34

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These notes discuss the Solow's Growth models, how they have evolved, and how the evolutions affect the production curve. They also talk about problems with Solow's theories, including the idea of...
Principles of Economics
Class Notes
Econ, 2006, Chapter, CH, 12, twelve, solow, growth, model, production, curve, problem, Theory, theories, steady, state, Convergence, Endogenous, Exogenous, Models
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This 2 page Class Notes was uploaded by Shannon Cummins on Sunday October 16, 2016. The Class Notes belongs to ECON 2006 at Virginia Polytechnic Institute and State University taught by Staff in Fall 2016. Since its upload, it has received 2 views. For similar materials see Principles of Economics in Macroeconomics at Virginia Polytechnic Institute and State University.


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Date Created: 10/16/16
Growth Theory—10.7.2016 Solow I:  Relationship between inputs and outputs in the economy  Y = F(physical capital, human capital, and natural resources)  First version of the model focused solely on physical capital. Why? Because: o Capital resources in wealthy nations far exceed those in developing nations o Periods of investment are correlated with periods of economic expansion Marginal product – the change in output divided by the change in input.  This means that the more given input, the higher the GDP. Diminishing marginal product – the marginal product of an input falls as the quantity of the input rises. Y (real GDP) Y3 Y2 Y1 K1 K2 K3 K (capital) Two theoretical implications: 1. Steady states – the long-run equilibrium point of a macro economy when there is no new net investment. Depreciation – the fall in the value of a resource over time. Net investment – investment minus depreciation. 2. Convergence – the idea that per capita GDP levels across nations will equalize as nations approach the steady state. These implications do not hold! The problem is that capital alone is not enough to explain sustained growth!! Solow II:  Technology allows us to produce more output with each input unit.  Graphically, the MPK curve will shift upward, but it won’t be a direct parallel shift.  Y = A x F(physical capital, human capital, natural resources), where A is a scalar accounting for technology change. F 2 Y (real GDP) F1 Y2 Y1 K K (capital) Modern growth theory:  Technological change is now considered endogenous, rather than exogenous. o Endogenous – directly affected by the function. o Exogenous – a constant; not affected by the function. Institutions – significant organizations, laws, and social mores in society that frame the incentive structure within which individuals and firms act.  Y = A x F(physical capital, human capital, natural resources, institutions)  Voluntary investment occurs if: expected return > costs  Graphically, successful institutions shift the production function upward. F 2 Y (real GDP) Y F1 2 Y1 K (capital) K


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