ECON long run

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  1. Investment and Capital Accumulation: The evolution of the capital stock is given by
  2. change in capital per worker over time
    • equal to saving per worker minus depreciation
    • Kt+1/N-Kt/N=sYt/N-δKt/N
  3. if there is increase in capital per worker
  4. effect of lower saving rate
    • lower output per worker
    • hence temporary lower(negative) growth 
    • no effect on long term growth
  5. for the developing countries, using PPP method results in … standard of living; exchange rate method … the standard of living because


    the lower a country’s output per capita, the lower the prices of food and basic services in that country.
  6. The Convergence of Output per Person since 1950(Asia and OECD countries)

    if a country show lower GDP per capita(horizonal), it shows higher annual GDP growth rate(vertical)

  7. CONVERGENCE: Countries with small capital stocks should grow rapidly because of

    Diminishing returns of capital

  8. Constant returns to scale

    if the scale of operation is doubled—that is, if the quantities of capital and labor are doubled—then output will also double.

  9. Decreasing returns to capital

    • increases in capital, given labor, lead to smaller and smaller increases in output as the level of capital
    • increases.

  10. Capital accumulation by itself cannot sustain growth, why?
    • Due Decreasing returns to capital, maintaining a steady increase in output per worker would require larger and larger increase in capital per worker. 
    • At some point the economy will be unable to save and invest enough to further increase capital
  11. Sustained growth requires
    technological progress
  12. what increases output level in long run
    • increase in tech state
    • increase in saving rate
    • decrease in dep'n rate
    The amount of capital determines the amount of output being produced

    The amount of output determines the amount of saving and, in turn, the amount of capital accumulated over time
  14. the relation between output and investment

    • T-G=0
    • I=S
    • S=sY
    • I=sY

  15. Derive steady-state consumption per worker
    • c = y – i
    • c = f(k) – sf(k)
    • since sf(K*)=δK*
    • c = f(k*) – δK*
  16. saving rate determines the allocation of ... between ... and ...
    • output
    • consumption and investment
  17. golden rule level of consumption can be achieved by
    • a particular level of saving rate such that where sf(K*)=δK* AND
    • marginal product of capital=δ(+gn+ga)
  18. testing constant return of scale
    the powers add up to one
  19. initial saving rate always equal to certain value signals
    initially at steady state
  20. Derive the steady state level of investment with population growth and tech progress
    • In S-S, K/AN is contant
    • K must grow at the same rate as A&N; gk=gn+ga
    • ΔK=(gn+ga)*K
    • I must be sufficient (1) to replace depreciated capital and (2) to allow the capital stock to increase by gn*K(providing new efficient units with S-S capital)
    • I=(δ+gn+ga)*K
  21. economies with higher rates of population growth will have
    lower level of capital thus lower income
  22. growth rate approximation

  23. what is growing at (ga+gn) in steady state
    • effective labour
    • capital
    • output
  24. Why would reduction in budget deficit lead to increase in output and investment in the long run?
    Reduction in budget deficit is equivalent to increase in public saving

    More saving, Shift up the long run investment curve; gives higher output per capital
  25. suppose Y=Bsq(K)sq(AN), find k and y in terms of s, delta, ga, gn

  26. An increase in the rate of technological progress will ....the steady-state levels of capital and output per effective worker

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ECON long run
2013-12-19 15:04:55
ECON long run
ECON long run
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