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• Diminishing marginal returns to physical capital, but perhaps not knowledge capital
• The idea that increased investment in human capital increases growth is key to linking higher savings rates to higher equilibrium growth rates
4-1
Chapter 4
Growth and Policy
• Item • Item • Item • Etc.
McGraw-Hill/Irwin Macroeconomics, 10e
© 2019 The McGraw-Hill Companies, Inc., All Rights Reserv4ed-.2
[Insert Figure 4-1 (a) and (b) here]
4-5
Mechanics of Endogenous Growth
• Need to modify the production function to allow百度文库for selfsustaining, endogenous growth
• Figure 4-1 (a) shows the Solow growth diagram, with the steady state at point C where savings equals required investment
• Due to the diminishing MPK, the production function and savings function flatten out and cross the upward sloping required investment line once
Introduction
• Chapter 3 explained how GDP and GDP growth are determined by the savings rate, rate of population growth, and the rate of technological progress
• By the late 1980’s there was great dissatisfaction with neoclassical growth theory since:
1. It does not explain the economic determinants of technological progress
• Endogenous growth theory (Romer, Lucas) explains how society’s choices lead to technological progress and growth
4-3
Trouble With Neoclassical Growth Theory
• Economy illustrated in Figure 4-1 (b) is described by a production function with a constant MPK: Y = aK (1)
• The question analyzed in this chapter is “How do society’s choices affect these parameters?”
• In many developed countries, invention and advances in technology are the key determinants of growth
• Technological advances are much less important for poor countries more important to invest in human and physical capital and borrow technological advances from others
4-4
Mechanics of Endogenous Growth
• Need to modify the production function to allow for selfsustaining, endogenous growth
• Figure 4-1 (a) shows the Solow growth diagram, with the steady state at point C where savings equals required investment
2. It predicts that economic growth and savings rates are uncorrelated in the steady state
• Endogenous growth theory emphasizes different growth opportunities in physical and knowledge capital
[Insert Figure 4-1 (a) and (b) here, again]
4-6
Mechanics of Endogenous Growth
• Need to modify the production function to allow for selfsustaining, endogenous growth
• If savings above required investment, economy is growing as more capital is added process continues until savings equals required investment (reach the steady state)
