macro chapter 5 summary

1. In the basic Solow model the only source of long-run growth in economic activity is population
g rowth. The basic Solow mod el cannot g enerate the long-run growth in GOP per capita that
we observe in the data.
2. The general Solow model developed in this chapter generalizes the basic Solow model by
introducing steady exogenous technological progress. This enables the model to generate
long-run growth in GOP per capita. Technical progress may be labour-augmenting, increasing
the efficiency of labour; it may be capital-augmenting, raising the productivity of capital, or it
may take the form of an increase in total factor productivity. As long as the aggregate
production function has the Cobb- Douglas form, all of these types of technological progress
are equivalent and have the same implications for the evolution of the economy.
3. In the long run the general Solow model converges on a steady state with balanced economic
growth, where total output, consumption, investment and the capital stock all grow at a rate
equal to the sum of the exogenous growth rates of population and labour-augmenting
productivity, where output per person, capital per person, corsumption per person, and the real wage rate all grow at the same rate as labour-augmenting productivity, and where the real
interest rate is constant. Hence the long-run economic predictions of the general Solow
model accord with the basic stylized facts about long-run growth. Outside steady state the
general Solow model accords with the observation of conditional convergence.
4. The general Solow model implies that structural economic policies which succeed in raising
the economy's savings rate or in reducing its rate of population growth will gradually take the
economy to a higher steady state growth path characterized by a higher level of steady state
income and consumption. The general Solow model implies the same golden savings rule as
the basic Solow model: long-run consumption per capita will be maximized when the savings
rate equals the capital income share of GOP.
5. Structural policies which increase the savings rate or reduce the population growth rate
cannot permanently raise the economy's growth rate. This can only be achieved via a policy
that permanently raises the growth rate of factor productivity, but the general Solow model is
silent about the factors determining technological progress.
6. Empirical data for a large sample of countries around the world confirm the steady state
prediction of the Solow model, that real GOP per worker will tend to be higher, the higher the
investment rate and the lower the population growth rate. However, for reasonable values of
the capital income share of GOP, the theoretical Solow model underestimates the observed
quantitative effects of these structural characteristics.
7. Outside tr e steady state the general Solow model predicts conditional convergence: controlling
for cross-country differences in structural characteristics, a country's growth rate will
be higher, the lower its initial level of real GOP per worker. The data for countries around the
world support this prediction, but for reasonable parameter values the theoretical model
si gnifi cant~ overestimates the rate (speed) at which economies converge.
8. Using an aggregate production function, one can estimate the contributions to aggregate
output growth stemming from increases in factor inputs and from increases in total factor
productivity. Such a decomposition of the overall growth rate is called growth accounting. In
basic growth accounting, growth in output per worker can originate from growth in the capital
stock per worker or from growth in total factor productivity. Still, in a causal sense the ultimate
soun;e of growth is te<.;hnologi<.;al progress, sin<.;e long-run g rowth in <.;apital per worker <.;an
only occur if there is continued growth in total factor productivity.

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