APPLIED MACROECONOMICS I Instructor: Maksym Obrizan Lecture notes III # 2. CHAPTER 7 Economic Growth I To compare economic well-being economists use different measures For example, we can compare GDP per capita converted to the US dollar This is probably the most common but not an ideal measure # 3. Digression: Big Mack index and purchasing power parity # 4. Penn World Table

# 5. Solow growth model For now we will abstract from those issues and use GDP per capita in US dollars as a measure of economic development We will formally develop a simplified version of Solow growth model – a cornerstone of modern macroeconomics # 6. Quick review of the production function Normalizing by the labor force # 7. The convenience of per capita notation# 8. Demand for goods and the consumption function

# 9. Figure 7-2# 10. The notion of the steady state Thus, the steady-state represents the long-run equilibrium of the economy # 11. Figure 7-4# 12. Notes

# 13. Numerical example# 14. Continued # 15. The effects of saving on the growth Quote from Mankiw: “If the saving rate is high, the economy will have a large capital stock and a high level of output. If the saving rate is low, the economy will have a small capital stock and a low level of output.” # 16.

# 17. Capital accumulation: the Golden Rule A benevolent policymaker may want to maximize the steady state level of consumption The level of capital that achieves the highest level of consumption is called the Golden Rule level of capital # 18. Comparing steady-states # 19. Figure 7-7# 20. Computing the steady state

# 21. A numerical example# 22. Notes # 23. Case I: Too much capital# 24. Case II: Too little capital

# 25. The effects of population growth# 26. Re-computing the steady-state # 27. Quote from Mankiw: “Because the number of workers is growing at rate n, however, total capital and total output must also be growing at rate n.” # 28.

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# 33. CHAPTER 8 Economic Growth II In this chapter we will try to make the Solow growth model more realistic by allowing for technological progress # 34. Technological progress in the Solow model This is called labor augmenting technological progress # 35. The steady state with technological progress # 36.

# 37. Notes# 38. Quote from Mankiw: “Once the economy is in steady state, the rate of growth of output per worker depends only on the rate of technological progress. According to the Solow model, only technological progress can explain persistently rising living standards.” # 39. Modification of the Golden Rule# 40. Policies to promote growth

# 41. Empirical relevance of the Solow model Quote from Mankiw: “According to the Solow model, technological progress causes the values of many variables to rise together in the steady state. This property, called balanced growth, does a good job of describing the long-run data for the U.S. economy.” # 42. Convergence # 43. Endogenizing growth Solow model does not explain technological progress – it is simply assumed in the model # 44. Quote from Mankiw: “To understand fully the process of economic growth, we need to go beyond the Solow model and develop models that explain technological progress. Models that do this often go by the label endogenous growth theory, because they reject the Solow model’s assumption of exogenous technological change.”

# 45. AK model of growth# 46. Notes # 47. A two-sector model# 48.