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Transcript
Economic growth
Danica Popović, December 4,
2007




"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/golden
gr.htm
Why?
Another three SFs
Average
earnings
& the
CPI
Averagehourly
hourly earnings
& the CPI,
1964-2004
250
Hourly earnings
in 2004 dollars
Wage ($ per hour)
18
16
200
14
12
10
150
Average hourly
earnings (nominal)
100
8
6
4
2
Consumer
Price Index
0
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
50
0
CPI (1982-84=100)
20
The capital-labour ratio stops changing when investment is equal to depreciation.
When not at point A, the economy moves towards its
steady state.
The steady state is one in which Δk = 0,

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




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.

Return to the list of the stylized
facts and check them against these
implications of this model.
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.

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)).
Endogenous growth

Romer, Lucas, King and Rebelo, and other scholars have developed models in
which steady growth can be generated endogenously—i.e., can occur without
any exogenous technical progress—at rates that may depend upon taste and
technology parameters and also tax policy.

Two caveats


never-ending growth requires never-ending
increases in human capital
The second logical difficulty of the endogenous
growth approach is the assumption of precisely
constant returns to scale in the crucial production
process. In the Lucas-Rebelo model, for instance,
the sum of the exponents on physical and human
capital must equal 1.00 exactly for steady-state
growth to be implied; if this sum equals 0.99
instead, then the economy will approach a steady
state in which there is no growth in the per capita
quantities.