The gap between income and savings is consumption.
If and
Catchup effect:
To illustrate.
If was low. Then would exceed depreciation, so would grow.
If then depreciation would exceed savings, so would shrink.
Either way we have a mechanism that pushes us towards .
Alpha has Bravo has
Alpha is less developed, Bravo is more developed.
"Each worker has one shovel."
If
If
Below we get that gets us a 22.5% increase in output, while gets us a 9.5% increase in output.
Less developed country with unit of capital will grow at 22.5% while the more developed country with units of capital will grow at 9.5%. This is the catchup effect.
Eventually the less developed country will catch up.
Proposition 2:
Some countries have higher depreciation rates than others.
Canada has a higher rate:
Salt on cars, rusty as hell.
If what happens to and ?
Then the depreciation line gets steeper, so the equilibrium point gets lower, so and get lower.
This makes intuitive sense. If you have a higher depreciation rate, then you need to save more to maintain the same level of capital, so you end up with less capital and less output.
In previous example. We know at we have
With a steeper line, higher . so
Proposition Savings:
If savings increase, we have a larger savings curve, so the equilibrium point gets higher, so and get higher.
What policies can we do to ?
Preconditions:
Stable economy (do you need to make a run for it?)
Best would've been to borrow a lot from Iran before the revolution, then pay nothing.
But you don't want to be on the wrong side, invest everything and get nothing back.
Trust in the government (do you think the government will waste your money?)
Tax incentives for saving.
Registered Education Savings Plan (RESP)
Registered Retirement Savings Plan (RRSP)
Tax Free Savings Account (TFSA)
Government bonds.
Consider different
Causes an increase in capital per worker, so and get higher.
As well as increase in GDP per worker.
Policies to effect this:
Policies which create stability.
Some countries have a lot of political instability, so they have a hard time attracting investment, so they have a hard time growing.
Nationalization of someone's investments could mean their money is gone, so they won't invest in that country.
Compare GDP of North and South Korea. North Korea has a lot of political instability, so they have a hard time attracting investment, so they have a hard time growing.
Labour Force Growth
Suppose Labour force , grows at per year.
The end of year labour force:
The break even line, .
If is higher then the break even line gets steeper, so the equilibrium point gets lower, so and get lower.
Vice versa.
Prop 5:
Growing population, results in lower GDP per worker.
Toy example:
If we have
Since
In equilibrium we have
That means that
A growing population will have a lower level of gdp. But the level of gdp will grow at the same rate as the population, so the gdp per worker will be constant.
4 dollars per year for each year for the rest of your life?
Or 2 dollars per year for each year for the rest of your life, but it grows at 10% per year?
is the amount you would have after 55 years if you took the second option. So the second option is better.
Not really, there's a good correlation between population growth and economic growth. But it can be bad if the population growth is too high, because then you have a lot of people competing for a limited amount of resources, which can lead to poverty and other problems.
Tech Progress
Labour Augmenting Tech Progress
is neutral tech progress.
Neutral
If we have , the index affects productivity of workers.
Example:
Double length bus, so you can fit twice as many people in the bus, so you can get twice as much output from the same amount of labour.
If and and and
The break even line.
Now slope increases to
Huge decline.
Is tech progress a good thing? Originally gdp was 4 per worker, now it's 1 per. Seems like a bad thing.
It's not because:
In equilibrium
If we have
We get
So the gdp grows at 30% per year, which is a good thing.
4 dollars per year for each year for the rest of your life?
Some fuckass bmw
Or 1 dollar per year for each year for the rest of your life, but it grows at 30% per year?
Honda after vtec
The second option is better.
Income per capita is growing at 20% per year, which is a good thing.
What's percent change in gdp per effective worker?