Macroeconomics

Summary

1.

In the steady state of the Solow growth model, the growth rate of income

per person is determined solely by the exogenous rate of technological

progress.

2.

Many empirical studies have examined to what extent the Solow model

can help explain long-run economic growth. The model can explain much

of what we see in the data, such as balanced growth and conditional

convergence. Recent studies have also found that international variation in

standards of living is attributable to a combination of capital accumulation

and the efficiency with which capital is used.

3.

In the Solow model with population growth and technological progress,

the Golden Rule (consumption-maximizing) steady state is characterized

by equality between the net marginal product of capital (MPK

−

d

) and the

steady-state growth rate of total income (n

+ g). In the U.S. economy, the

net marginal product of capital is well in excess of the growth rate, indicat-

ing that the U.S. economy has a lower saving rate and less capital than it

would have in the Golden Rule steady state.

4.

Policymakers in the United States and other countries often claim that their

nations should devote a larger percentage of their output to saving and

investment. Increased public saving and tax incentives for private saving are

two ways to encourage capital accumulation. Policymakers can also

promote economic growth by setting up the right legal and financial insti-

tutions so that resources are allocated efficiently and by ensuring proper

incentives to encourage research and technological progress.

5.

In the early 1970s, the rate of growth of income per person fell substantial-

ly in most industrialized countries, including the United States. The cause

of this slowdown is not well understood. In the mid-1990s, the U.S. growth

rate increased, most likely because of advances in information technology.

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P A R T   I I I

Growth Theory: The Economy in the Very Long Run

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6.

Modern theories of endogenous growth attempt to explain the rate of

technological progress, which the Solow model takes as exogenous. These

models try to explain the decisions that determine the creation of

knowledge through research and development.

C H A P T E R   8

Economic Growth II: Technology, Empirics, and Policy

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K E Y   C O N C E P T S

Efficiency of labor

Labor-augmenting technological

progress

Endogenous growth theory