Jun 21st, 2015
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The University of Texas School of Health Professions
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Chapter 6Long-Run Economic GrowthLearning Objectives I.Goals of Chapter 6A.Identify forces that determine the growth rate of an economy1.Changes in productivity are key2.Saving and investment decisions are also importantB.Examine policies governments may use to influence the rate of growth II.Notes to Sixth Edition UsersA.This chapter remains largely unchanged, except for updated data in the applicationsTeaching Notes I.The Sources of Economic Growth (Sec. 6.1)A.Production functionY AF(K, N)(6.1)1.Decompose into growth rate form: the growth accounting equationY/Y A/A aK K/K aN N/N(6.2)2.The a terms are the elasticities of output with respect to the inputs (capital and labor)3.Interpretationa.A rise of 10% in A raises output by 10%b.A rise of 10% in K raises output by aK times 10%c.A rise of 10% in N raises output by aN times 10%4.Both aK and aN are less than 1 due to diminishing marginal productivityB.Growth accounting1.Four steps in breaking output growth into its causes (productivity growth, capital input growth, labor input growth)a.Get data on Y/Y, K/K, and N/N, adjusting for quality changesb.Estimate aK and aN from historical datac.Calculate the contributions of K and N as aK K/K and aN N/N, respectivelyd.Calculate productivity growth as the residual: A/A Y/Y aK K/K aN N/NNumerical Problems 1 and 2 are growth accounting exercises.2.G

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