Growth, Capital Accumulation, and the Economics of Ideas Growth, Capital Accumulation, and the ...

61 Pages·2015·1.81 MB·English

MODERN PRINCIPLES OF ECONOMICS
Chapter 8
Third Edition
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Outline
(cid:1)
The Solow Model and Catching-Up Growth
(cid:1)
The Investment Rate and Conditional
Convergence
(cid:1)
New Ideas and Cutting-Edge Growth
(cid:1)
The Economics of Ideas
(cid:1)
The Future of Economic Growth
2
Introduction
(cid:1)
In 2010:
• U.S. GDP per capita grew by 2.3%.
• China’s GDP per capita grew by 10%.
(cid:1)
The U.S. has never grown as fast as the
Chinese economy is growing today.
(cid:1)
China is growing much faster than the U.S.
because:
• The U.S. economy is on the cutting edge.
• The Chinese economy is catching up.
3
Definition
Cutting-edge growth:
Growth due to new ideas.
Catching-up growth:
Growth due to capital accumulation.
4
The Solow Model and Catching-Up Growth
(cid:1)
The Solow model begins with a production
function.
(cid:1)
The total output of an economy (Y) depends on:
• Physical capital (K)
• Human capital, or education x Labor (eL)
• Ideas (A)
(cid:1)
A production function expresses a
relationship between output and the factors of
production: Y = F(A,K, eL)
5
The Solow Model
(cid:1)
If we assume that A, e, and L are constant, then
we can simplify our expression for output as:
( )
Y = F K
(cid:1)
More capital (K) should produce more output
(Y) but at a diminishing rate.
• Because L is constant, an increase in K always
implies an increase in the amount of capital per
worker, K/L, and an increase in Y is also always an
increase in output per worker, Y/L.
6
Self-Check
Catching-up growth is growth due to:
a. New ideas.
b. Capital accumulation.
c. Adoption of new technologies.
Answer: b – capital accumulation.
7
Definition
Marginal product of capital:
The increase in output caused by the
addition of one more unit of capital. The
marginal product of capital diminishes
as more and more capital is added.
8
The Solow Model:
Capital, Production and Diminishing Returns
(cid:1)
More capital (K) should produce more output
(Y) but at a diminishing rate.
(cid:1)
The MP diminishes because the first unit of
K
capital is applied where it is most productive,
the second where it is slightly less productive,
and so on.
(cid:1)
The following graph shows the production
K
function Y = F (K ) =
(cid:1)
In this case, output is the square root of the
capital input:
4
If K = 4, then Y = = 2
If K increases to 16, then Y = 1 6 = 4
9
Diminishing Returns
Output, Y
Y= K
3.2
3
Creates just
a little output
1
Creates a lot
of output
0
Capital, K
0 1 2 3 4 5 6 7 8 9 10 11 12
The first unit The tenth unit
of input of input 10