ECON 112 - Measures in Price Level, Macro Identities, Solow Model

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Questions and Answers

According to the General Cobb-Douglas model, what happens to per capita output when more laborers have to share the same machine?

Per capita output decreases

Explain the relationship between population and per capita income in the General Cobb-Douglas model.

Population makes the economy grow by increasing activity, but not the per capita income.

What does the convergence process refer to in the context of economies?

Convergence process refers to one economy catching up with others.

How does the capital labor ratio impact per capita income in the General Cobb-Douglas model?

Per capita income grows in a concave manner due to the law of diminishing marginal productivity. Signup and view all the answers

In the context of the General Cobb-Douglas model, why do economies like the Philippines and the US not converge despite having different capital labor ratios?

Technology and efficiency levels vary among economies, preventing convergence. Signup and view all the answers

What effect does increased investment have on the convergence of economies in the General Cobb-Douglas model?

Increased investment will not lead to convergence as returns will remain the same for different economies. Signup and view all the answers

Explain the relationship between government budget deficit and the trade deficit in an open economy.

The government budget deficit is equal to the crowding out effect and trade deficit in an open economy. Signup and view all the answers

Define the twin deficit and how it is related to the budget deficit and trade deficit.

The twin deficit refers to a situation where a country has both a budget deficit and a trade deficit. It is related as the budget deficit usually leads to a trade deficit. Signup and view all the answers

What is the Solow Model and what does it describe?

The Solow Model, developed in the 1950s, describes how capital, labor, and technology interact to determine an economy's output. Signup and view all the answers

Explain the components of the General Cobb-Douglas model and their impact on output.

The General Cobb-Douglas model includes technology, capital, and labor as components that positively affect output. Technology has the greatest effect followed by capital then labor in that order. Signup and view all the answers

What is the convergence process in the Solow Model?

The convergence process in the Solow Model refers to the tendency of countries with lower income levels to grow faster and catch up with countries with higher income levels over time. Signup and view all the answers

How does the government's budget surplus or deficit impact the private sector in the loanable funds market?

The government's budget surplus or deficit affects the private sector by influencing the availability of funds for investment in the loanable funds market. Signup and view all the answers

What is the relationship between the growth of per capita income (dy/y) and the growth in technology (dA/A) in the context of the text?

The growth of per capita income is positive when technology grows. Technology plays the biggest factor in the growth of per capita income. Signup and view all the answers

Which factor is considered the most important for raising the standard of living in terms of per capita income?

Technology is considered the most important factor. Signup and view all the answers

In the Solow Model, what does technology represent?

Technology represents the residual factor that is not explicitly explained. Signup and view all the answers

What does the General Cobb-Douglas model suggest about the importance of technology?

The General Cobb-Douglas model suggests that technology is crucial but not fully understood. Signup and view all the answers

How does the text describe the difficulty in manipulating or adjusting technology?

The text describes technology as something that is hard to manipulate or adjust. Signup and view all the answers

What is the formula provided in the text to calculate the relationship between the growth in technology, growth in capital, and per capita income growth?

dA/A = dy/y - θ dk/k Signup and view all the answers

Study Notes

Cobb-Douglas Production Function

The production function shows that if there are more laborers who have to share the same machine, the per capita output decreases.
The function is represented by: 1−θ Y = A𝐾 𝑁
Capital (K) and labor (N) are essential factors in production, with capital being more important than labor (θ > 0).
The economy grows by increasing activity, but not the per capita income.

Convergence Process

The convergence process describes how one economy catches up with others.
The per capita income (y) is affected by the capital labor ratio (k) and technology (A).
The growth of per capita income is concave due to the law of diminishing marginal productivity.
Economies with a lower capital labor ratio will see a greater rate of change compared to those with a higher capital labor ratio.

Example: Philippines and the US

The Philippines has a lower capital labor ratio, resulting in lower per capita income compared to the US.
If the capital labor ratio of both countries is increased, the Philippines will see a greater rate of change compared to the US.

Technology and Convergence

Technology raises the ceiling of per capita income, even with the same capital labor ratio.
Assuming all economies have the same level of technology and efficiency, increasing investment in both countries will not lead to convergence.
The residual (dY/Y) is the growth of per capita income, which is the growth in technology (dA/A) and the share of capital (θ) times the growth rate of capital labor ratio (dk/k).

Solow Model

The Solow model argues that technology is the most important factor in economic growth.
The model is represented by: Y = AF (K,N)
The model shows that technology (A) is a key factor in production, and that the growth of per capita income is affected by the growth in technology and the capital labor ratio.

Government and Economy

Government budget deficit (G-T) is equal to the crowding out (S-I) and trade deficit (M-X).
A positive G-T means the government spent more than it collected, while a negative G-T means it saved more than it spent.
The private sector can use what the government saved, but crowding out can result in higher taxes, interest rates, and increased government spending.
The government competes in the loanable funds market.

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Description

Explore the relationship between labor, capital, population, and per capita output in a Cobb-Douglas production function. Understand how changes in population can impact the per capita income and economic growth. Delve into the convergence process and factors affecting the economy.