Economic growth

1. Economic growth Danica Popović, December 4, 2007

2. "Then a policy-maker was heard to say, "Forget grand optimality. Solovians are a simple people. We need a simple policy...If we make investment a constant proportion of output, our search for the ideal investment policy reduces to finding the best value of s, the fixed investment ratio." "It's fair," Solovians all said. The King agreed. So he established a prize for discovery of the optimum investment ratio." • (Edmund S. Phelps, "Golden Rule of Accumulation", American Economic Review, 1961) • ________________________________________________________ • http://cepa.newschool.edu/~het/essays/growth/optimal/goldengr.htm

5. Why?

8. Another three SFs

10. Average hourly earnings (nominal) Consumer Price Index Average hourly earnings & the CPI Hourly earnings in 2004 dollars

15. The capital-labour ratio stops changing when investment is equal to depreciation.

16. When not at point A, the economy moves towards its steady state. The steady state is one in which Δk = 0,

18. Edmund Phelps acquired an international reputation through his work on the golden rule of capital accumulation (he was 28). This concept now appears in the toolbox of every economist, is taught in all classes on growth, and serves as a reference in all works on the macro economy

25. the capital accumulation line is now δ+a+n, where a is the rate of technological progress. • The steady state is occurs when investment is equal to (δ+a+n)k. • This occurs at point A, the intersection between the saving schedule sf(k) and the capital widening line (δ+a+n)k. • At the steady-state k, output and capital increase at rate a+n, while GDP per capita increases at rate a.

26. Return to the list of the stylized facts and check them against these implications of this model.

27. One of the main points of Table 3.4 is that the numbers of the population and the numbers of employed have grown at roughly the same rates over the course of the twentieth century for these countries, meaning that many trends (people entering the labour force later, retiring earlier, living longer and increased participation in the labour market by women) have more or less offset each other as far as the numbers of workers are concerned. However the other main point is to see that the reduction in hours per employee has more than offset the growth in employment.

29. Burda and Wyplosz register some surprise that the 1990s did not generally show a major improvement in the contribution of technological progress (exceptions being Germany and the US where the residuals are larger in Table 3.5(c) than in 3.5(b)).

30. Endogenous growth • Romer, Lucas,King and Rebelo, and other scholars have developed models in which steadygrowth can be generated endogenously—i.e., can occur without any exogenoustechnical progress—at rates that may depend upon taste and technology parametersand also tax policy.

32. Two caveats • never-ending growth requires never-ending increases in human capital • The second logical difficulty of the endogenous growth approach is theassumption of precisely constant returns to scale in the crucial productionprocess. In the Lucas-Rebelo model, for instance, the sum of the exponentson physical and human capital must equal 1.00 exactlyforsteady-state growth to be implied; if this sum equals 0.99 instead, then theeconomy will approach a steady state in which there is no growth in the percapita quantities.