Economics for Business II Day 10 - Solow Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

December 29, 2011BECO II - Day 10 - Solow2 Solow Growth Model Robert Solow created the basic Growth Model Robert Solow created the basic Growth Model Productivity is what the model examines Productivity is what the model examines –Output per worker (or output per person) Productivity depends upon capital per worker Productivity depends upon capital per worker Increases in capital per worker increases productivity Increases in capital per worker increases productivity –Note Solow model: increase k → increase y … yet diminishing

December 29, 2011BECO II - Day 10 - Solow3 Solow Growth Model Labor is the most basic input! Labor is the most basic input! Increases in population decrease output per worker (as they decrease capital per worker) Increases in population decrease output per worker (as they decrease capital per worker) Capital has about a 25% share, whereas Labor has a 75% share of output Capital has about a 25% share, whereas Labor has a 75% share of output Technology is also an important component Technology is also an important component

December 29, 2011BECO II - Day 10 - Solow4 Improvements to L-R Growth Long-run growth results from improvements in technology and human capital. We find that human capital is the most important component of productivity!

December 29, 2011BECO II - Day 10 - Solow5 Human Capital Remember that Human Capital is not JUST education but ALL training, experience and on-the-job learning too! Health care while a side issue is also important as you are not usually learning while sick!

December 29, 2011BECO II - Day 10 - Solow6 Saving Savings is also a very important component of productivity (output per worker)! However, Saving more may increase the LEVEL of productivity but not the growth rate of productivity. That is to say, saving increases the standard of living but not the growth rate of the standard of living (not growing more wealthy faster).