Endogenous Growth: The Impact of Economic Decisions on Per Capita Output - Prof. Chris Otr, Study notes of Macroeconomics

Download Endogenous Growth: The Impact of Economic Decisions on Per Capita Output - Prof. Chris Otr and more Study notes Macroeconomics in PDF only on Docsity! 1 1 Chapter 7: Endogenous Growth • Endogenous growth: growth in per capita output depends on the economic decisions in the model • Government policy and economic growth 2 • Endogenous Growth – A basic Endogenous growth model: Yt = z Kt – where z is the constant MPK – There is no technology growth and no population growth: u = b = 0 – S is the savings rate (which is constant) – Investment equals total saving in equilibrium: It = S ×Yt = S × z Kt – The capital stock evolves over time following: Kt+1 = (1- d + Sz) Kt 3 – Which gives the capital stock growth rate of – Output Growth is the same – C and I grow at the same rate – For positive growth the MPK multiplied by the savings rate must be greater than depreciation • Exogenous versus Endogenous growth – In Endogenous growth model: ⇑ MPK (z) or ⇑ S ⇒ ⇑ in growth rate of all variables dSz1 K K t 1t −=−+ 4 – Model produces perpetual growth – Economic factors have growth effects – Key message of Endogenous growth model: MPK is not diminishing, living standards can rise indefinitely without exogenous changes in technology – Key message of Solow model: continued increases in standard of living occur only with technological change (since we have a diminishing MPK)