Economy in the LONG RUN I. The Aggregate Production Function II. Classical Growth Model (not in textbook) III. Neo-classical Growth Model - without long term growth - with population and technology growth IV. Policies
II. Classical Growth Theory (Malthusian theory) The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end. Population (West Europe & China) 200 150 100 50 0 0 200 400 600 800 1000 1200 1400 1600 1800
II. Classical Growth Theory (Malthusian theory) The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end. GDP per Capita (West Europe & China) 1,000 900 800 700 600 500 400 300 0 200 400 600 800 1000 1200 1400 1600 1800
II. Classical Growth Theory (Malthusian theory) The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end. GDP per Capita growth (West Europe & China) 1.00% 0 200 400 600 800 1000 1200 1400 1600 1800 0.50% 0.00% -0.50% -1.00%
Thomas Robert Malthus (1766 1834) An Essay on the Principle of Population (1798), Malthus observed that an increase in a nation's food production improved the well-being of the populace, but the improvement was temporary because it led to population growth, which in turn restored the original per capita production level. Malthusian trap = Mankind had a propensity to utilize abundance for population growth rather than for maintaining a high standard of living.
When the classical economists were developing their ideas about population growth, (1) land was seen as the crucial capital needed for production; (2) all surface of Earth was discovered ; (3) an unprecedented population explosion was under way.
When the classical economists were developing their ideas about population growth, (1) land was seen as the crucial capital needed for production; (2) all surface of Earth was discovered ; (3) an unprecedented population explosion was under way. To explain the high rate of population growth, the classical economists used the idea of a subsistence real income ( y s, real GDP per capita). In classical theory, when real income (per capita) exceeds the subsistence real income, the population grows. No matter how much technological change occurs, real income is always pushed back toward the subsistence level. (This dismal implication led to economics being called the dismal science.) Experiment: Suppose capital increase & technological advance happens
1. The economy starts at point A on production function curve F 0 with real GDP at the subsistence level and constant population. Real GDP per Capita Capital per capita decreases GDP per capita decreases Population Increases F 0 (K/N,1) Population Decreases 0 Capital per Capita
1. The economy starts at point A on production function curve F 0 with real GDP at the subsistence level and constant population. 2. As capital per capita increases, real GDP per capita rises above the subsistence level the economy moves to point B. Real GDP per Capita 3. As technological advance (and human capital accumulate) increase productivity, the production curve shifts upward to F 1 the economy moves to C. 4. With real GDP above the subsistence level, the population grows and capital per capita decreases downward along F 1. 5. At point D, the economy is back at the subsistence level of real GDP per capita. Point D is the new STEADY STATE F 1 (K/N,1) F 0 (K/N,1) 0 Capital per Capita
Interactions Between Output and Capital Classical Growth Model Malthus (1798) Population The amount of capital determines the amount of output being produced. The amount of output determines the size of population. The change in population determines the change of capital (= land in 1798) stock per capita.
Interactions Between Output and Capital Classical Growth Model Malthus (1798) Population The amount of capital determines the amount of output being produced. The amount of output determines the size of population. The change in population determines the change of capital (= land in 1798) stock per capita. (i) CLASSICAL GROWTH MODEL Suppose that Y t = N t K t and N t+1 = N t * [1+(Y t /N t y s )/y s ] where y s is the subsistence level of income. Assume that K t = K = 81 for all t N 0 = 49 and y s = 1 Determine the output per capita in period 0. Y 0 /N 0 = 63 / 49 = 9 / 7 = 1.286 Determine the population in period 1. N 1 =49 * [1+(1.286 1)/1] = 63 Determine the output per capita in period 1. Y 1 /N 1 = 71.435/63 = 1.134 Determine the population in period 2. N 2 =63 * [1+(1.134 1)/1] = 71.435 Determine the output per capita in period 2. Y 2 /N 2 =76.067/71.435 = 1.065
(i) CLASSICAL GROWTH MODEL Suppose that Y t = N t K t and N t+1 = N t * [1+(Y t /N t y s )/y s ] where y s is the subsistence level of income. Assume that K t = K = 81 for all t N 0 = 49 and y s = 1 Determine the output per capita in period 0. Y 0 /N 0 = 63 / 49 = 9 / 7 = 1.286 Determine the population in period 1. N 1 =49 * [1+(1.286 1)/1] = 63 Determine the output per capita in period 1. Y 1 /N 1 = 71.435/63 = 1.134 Determine the population in period 2. N 2 =63 * [1+(1.134 1)/1] = 71.435 Determine the output per capita in period 2. Y 2 /N 2 =76.067/71.435 = 1.065 CLASICAL GROWTH MODEL STEADY STATE Suppose that Y t = N t K t and N t+1 = N t * [1+(Y t /N t y s )/y s ] where Y*/N*= y y s is s the subsistence level of income. Assume that K t = 81 for all t N 0 = N = 49 and y s = 1 Determine the steady state level of output per capita. Y*/N* = y s = 1 Determine the steady state population. N*=? : Y*/N* = 1 Y* = N* 81 Y* = N* = N* 81 N* = 81 f(k/n)