Chapter 6: Long-Run Economic Growth, sources, and policies

What are the two major factors that influence the level of labor productivity

the quantity of capital available to workers, and the level of technology

The Solow model of economic growth

The primary source of long run economic growth is technology

Per worker production function

shows the relationship between real gdp per hour worked (Y/L) and capital per hour worked (K/L)

what shifts the production function

a change in technology

What happens to real gdp when capital per hours worked (k/l) increases

The increase in gdp becomes progressively smaller

diminishing returns

When we add more of an input (capital) to a fixed amount of another input (labor), so output increases by progressively smaller units

marginal product of capital

the increase in output that results from employing an additional unit of capital per worker

capital vs. technological change

capital is subject to diminishing returns while technological change can increase real output per hour worked

Why is the Solow growth model viewed as incomplete

It does not explain the factors that lead to technological change

The New Growth Theory

Knowledge capital is the primary source of economic growth in the long run, because it is the source of technological change

Knowledge capital at a firm vs. economic level

At a firm level, it is subject to diminishing returns while at an economic level, it is subject to increasing returns because it can be shared across firms

Market failure

when the free market doesn’t provide an efficient amount of a good or service

During market failure, how can the government help

protecting intellectual property, supporting research and development, and subsidizing education

why isn’t the whole world rich

catch-up hypothesis

catch up hypothesis

The idea that poorer countries can grow faster than richer ones due to existing research and development and technology

Growth policies for poorer counties to catch up

1. rule of law, protection of property rights, political freedoms

2. investment in health care and education

3. Investment in good physical capital (roads, airports)

4. Promoting innovation and technological progress

5. Promoting saving and investment