Class Slides for EC 204 Spring 2006 To Accompany Chapters 7-8

The Supply of Goods and the Production Function: The Solow Growth Model

The Demand for Goods and the Consumption Function:

Growth in the Capital Stock and the Steady State:

The Golden Rule Steady State

Economy has Too Much Capital

Economy has Too Little Capital

Allowing for Population Growth in the Solow Model

Population Growth versus Labor Force Growth Really should have growth of labor force in model rather than population growth But if the labor force participation rate is stable over time, then Population growth equals labor force growth Take a look at the data:

Labor Force Participation Overall rate has increased steadily over the past half century Men’s participation rate has dropped sharply Women’s participation rate has increased What about older workers?

Allowing for Technological Progress in the Solow Model

Does the U.S. Have Too Much or Too Little Capital?

So, U.S. has too little capital and should save more to reach Golden-Rule steady state

Policies to Promote Growth According to Golden Rule the U.S. Capital Stock is too small. 1. Increase Saving Rate: Public and Private Saving 2. Allocate More Efficiently Economy’s Investment 3. Encourage Technological Progress

Worldwide Slowdown in Economic Growth Growth rate fell sharply in early 1970s worldwide and remained low. Slowdown in growth was due to a slowdown in total factor productivity growth--closely related to the efficiency of labor in Solow Model. Real income in the United States today is about 20 percent lower the it would have been if the slowdown had not occurred. Recently, some economist believe that productivity growth has picked up and that the long-run growth of the economy is now again close to what it was before the slowdown.

Reasons for the Slowdown 1. Measurement Problems--but would have to have gotten worse over time. 2. Oil Prices--timing is correct, yet magnitude and 1986 drop? 3. Worker Quality--demographics and social norms lead to less experienced workforce. Also, educational attainment not increasing as fast as in past and quality of education may be lower. 4. Depletion of Ideas--1950s and 1960s were unusual, had a backlog of ideas that hadn’t been implemented fully due to depression and war. Growth from not much different!

Information Technology and the “New Economy” Took some time for computers to be used effectively Similar to electric motor in late 19th-early 20th centuries Three channels: 1. Direct productivity gains in computer sector 2. Accumulation of “info-technology” capital 3. Indirect productivity gains in other sectors

Testing the Solow Model’s Predictions Balanced growth: Y/L and K/L have grown at about 2 percent per year over last half century, so Y/K ratio roughly constant; real wages grow at about 2 percent rate while real rental approximately constant Convergence: Across regions of U.S.; Conditional convergence across countries Factor Accumulation versus Production Efficiency: Both matter for growth

Accounting for the Sources of Growth

Endogenous Growth Theory