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Macroeconomics

Long Run Growth &


Dynamics
Goals for this Chapter

Focus on growth in real output.


Most countries have enjoyed substantial growth in real incomes and consumption
per capita.
Also observe large differences in the standard of living and growth experiences across
countries.
Solow Model of Economic Growth.
Shows how saving, population growth, and technological progress affect growth in
output
With the model can ask what govt policies influence growth in output and standards
of living over time.

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Preliminaries: Using Growth rates
Rule 1: When can we add growth rates?
if Z = X Y
then Growth(Z) = Growth(X) + Growth(Y)
Example:
Y = Income = Wage x Hours Worked =W x L
If you work 10% more hours and your hourly wage is increased 5%, then your
income increases by approximately 15%.
This approximation works well when growth rates are small, but not when
they are large.

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Preliminaries: Using Growth rates
Rule 2: When can we not add growth rates?
if Z = X + Y
Cannot add growth rates of X and Y to get growth in Z.
Example:
Yd = C + S
Disposable Income Yd0 = 100 Yd1 = 100,
Consumption C0=75 C1 = 50,
Saving S0=25 S1 = 50
Growth(Yd) = 0,
Growth(C) = -33.3%,
Growth(S) = +100%
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