Long-run growth theory including the Solow growth model, productivity, and determinants of economic growth.
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- What is the Solow growth model?
- A neoclassical model explaining long-run economic growth through capital accumulation, labor force growth, and technological progress, with a unique steady state where per capita growth depends only on the rate of technological change.
- In the Solow model, what is the standard production function form?
- Y = A * K^alpha * L^(1-alpha), where Y is output, A is total factor productivity, K is capital, L is labor, and alpha is capital's share of income.
- What is capital deepening?
- An increase in the capital-to-labor ratio (K/L), which raises labor productivity and output per worker in the short run.
- Define steady state in the Solow model.
- A long-run equilibrium where capital per worker, output per worker, and consumption per worker all remain constant over time, with the capital stock growing at the same rate as the labor force.
- What is Total Factor Productivity (TFP)?
- A measure of output that cannot be explained by the quantities of capital and labor used; it captures the efficiency and technological level of an economy.
- What does the growth accounting equation decompose?
- Output growth into contributions from capital accumulation, labor growth, and total factor productivity growth.
- What is the Solow residual?
- The portion of output growth not explained by measured changes in capital and labor inputs, attributable to technological progress and measurement error.
- On a balanced growth path, how do capital and output grow?
- Both capital and output grow at the same rate as the labor force plus the rate of technological progress.
- What types of technological progress exist in growth theory?
- Harrod-neutral (labor-augmenting), Solow-neutral (capital-augmenting), and Hicks-neutral (output-augmenting), each affecting the productivity of factors differently.
- Why does diminishing returns to capital occur in the Solow model?
- Because the marginal product of capital falls as capital per worker increases, given fixed technology and labor, so ever-larger increases in capital yield smaller increments to output.
- What is beta convergence?
- The tendency for poorer economies to grow faster than richer ones, causing their incomes to converge over time.
- What is sigma convergence?
- A decrease over time in the cross-country dispersion (standard deviation) of income levels.
- What is conditional convergence?
- The convergence of economies to their own steady-state income level, which depends on each country's savings rate, population growth, and other structural parameters.
- How does population growth affect long-run per capita growth in the Solow model?
- Population growth does not affect the long-run per capita growth rate (which depends only on technological progress), but it lowers the steady-state level of capital and output per worker.
- What is a poverty trap in economic growth theory?
- A self-reinforcing mechanism where low current income leads to low savings and investment, preventing an economy from accumulating enough capital to escape poverty.