MACRO 1- Econ Growth

• -
• -
• Constant returns to scale
• -
• -
• -
• -
• Positive diminishing returns.
• -
• -
• -
• -
• -
• -

Change in capital =0. 

Example

Policy makers have to adjust the savings rate the get the level of growth that maxmiuses cosumption. 

If start with too much capital. Policy makers should reduce s. Consumption is higher not only in the new steady state but also along the entire path to ***. When s>s* economy is dynamically inefficient. 

Example

• Population and labour force grow at constant rate n.
• -
• -
• -                defines breakeven investment. The amount of investment needed to keep capital stock per worker constant.
• Example
• -
• -
• -
• -
• -
• -
• -
• -
• -
• -
• c* is maximised when MPK=      +n

• Adding tech progress - grows at a constant rate of g.
• Production Fuction
• -
• Now we analyse the economy in terms of quantities per effective worker
• -
• -
• -
• Balanced Growth
• Tech progress causes the values of many variables to rise together in the steady state - y and k grow at rate g.
• Now this model explains the sustained grwoth and persistant rising living standards that we observe.

• The catchup of poor economies to rich economies all called convergence. Three reasons why this might happen:
  • First- the solow model predicts countries converge to their bgp. The differences in output per worker arise from countries being a different points relative to their bgp, expect poor countries to catch up
  • Second - the solow model implies that the rate of return on capital is lower in countries with more capital per worker. Thus incentives for capital to flow from rich to poor countries
  • Third- large lags in diffusion of knowledge. Income differences can arise because some countries are not yet employing the best technologies. These differences might shrink as poorer countries gain access.

• Baumol (1986) regresses output growth over this period on a constant and initial income:
• -
• -
• If there is convergence b will be negative: countries with higher initial incomes have lower growth.
• b=-1 is perfect convergence.
• b=0 growth is uncorrelated with initial invomes and thus there is no convergence.
• Results
  • b=-0.995
  • almost perfect convergence

• DeLong (1988) demonstrates that Baumol's finding of convergence is larger spurious. Two problems:
  • Sample selection- he includes 7 countries to the study. This regression now produces an estimate of b=-0.566. Accounting for the selection bias eliminates about half of the convergence.
  • Measurement error- estimates of real income per capita in 1870 are imprecise. When it is overstated, growth in understated by an equal amount. Thus measurement growth tends to be lower in countries with higher intial income even if there is no relation between actual growth and actual initial income. 

• Consider a world where every country is described by the Solow model and where all countries have the same amount of capital per unit of effective labour.
• The savings rate in one country rises.
• If all additional saving is invested domestically, the MPK in that country falls below that in other countries.
• The county's residents therefore have incentives to invest abroad - the investment resulting from the increased saving is spread uniformly over the world. 
• In the absence in barriers to capital movemements, there is no reason to expect countries with high saving to also have high investment.

• Ran a regression for 21 industrialised countries of the average share on investment in GDP and the average share of saving in GDP. 
• Found a one-to-one relation between saving and investment
• Possible Explanations: 
  • Significant barriers to capital movement
  • Underlying variables exist that affect both saving and investment. E.g. high tax rates can reduce both saving and investment 
  • Gov policies