2 - Economic Growth With Technology

Question 1

What are the 4 different different terms in the Solow-swan growth model

Answer 1

• Size of Capital stock (K)
• Level of national output (Y)
• Consumption (C)
• Depreciation of capital (D)

Question 2

What does the Solow-Swan growth model show

Answer 2

• Explains Long-term growth in an economy
• Focuses on accumulation of capital, population growth and technological progress as key drivers for economic growth
• Model suggests an initial increase in investment and capital accumulation leads to economic growth, but overtime, diminishing returns to capital set in, resulting in a steady-state level of output per capita
• Technological progress is seen as a crucial factor in sustaining long-term economic growth

Question 3

Where is steady state

Answer 3

Where investment is equal to depreciation

Meaning all investment is being used to repair and replace capital stock; no new capital is being created

Question 4

Key assumption of the Solow-Swan growth model

Answer 4

• Constant returns to scale: Total output doubles if all inputs (capital and labour) double
• Capital depreciates over time
• Y= F(K,N)

Question 5

What is consumption

Answer 5

National income - Saving

Question 6

What does Solow assume in the Solow-swan model

Answer 6

Assumes full employment of capital and labour

Question 7

Explain the graph of steady state output

Answer 7

• Output line suddenly increases from origin and curves off straight (diminishes)
• Investment line increases from origin but not very much then curves off straight
• Depreciation line is a straight diagonal line from the origin, that crosses over investment and finishes just above
• Where investment and Depreciation cross over is the steady state output

Question 8

What happens to the graph when there is an increase rate of saving and investment

Answer 8

• The investment curve shifts upwards (left), leading to a higher steady state output and higher steady state capital stock

Question 9

Policies that promote investment in physical and human capital leads to what which then results in higher steady state output

Answer 9

Leads to encouragement of innovation and technological progress, which improves efficiency of markets leading to higher steady state output

Question 10

What is the golden-rule saving rate

Answer 10

• Savings rate that maximises consumption in the steady state while ensuring that capital stock per worker is at its optimal level
• Too low a savings rate may lead to lower future output and consumption, and too high savings rate sacrifices current consumption

Question 11

Describe what happens to the graph when there is technological progress

Answer 11

• Output curve shifts upwards (left) as well as the investment curve shifts upwards (left) as well
• Resulting in higher steady state output and higher steady state capital stock