The Theory of Economic Growth:
Eventually long-run growth is the most significant aspect of how the economy functions. Material principles of living and levels of economic productivity in the U.S. today are about 4-times what they are today in, say, Mexico-and five or so times what they were at end of the 19th century, because of fast, sustained long-run economic progress. Good and bad guidelines can speed up or cripple this growth. Argentines were more affluent than Swedes before World War I, but Swedes today have four times standard of living and productivity level of Argentines. More or less all of this difference is due to differences in growth guidelines working through two channels. The first is impact of guidelines on the economy’s technology which multiplies the efficiency of labor. The second is their impact on economy’s capital intensity (the stock ofequipment, machines, and buildings).
In this development section,our aim is to build up the growth model which economists use to analyze how much growth is produced by the advance of technology and how much by investment to increase capital intensity on other.Better Technology:
The reason that Americans today are more productive than their ancestors of a century before is better technology. We now know how to make dope semiconductors, electric motors, transmit signals over fly jet airplanes, fiber optics, , build tall and durable structures out of concrete and steel,machine internal combustion engines, record entertainment programs on magnetic tape, make hybrid seeds, organize assembly lines, fertilize crops with nutrientsand a lot of other things our predecessors didn’t know how to do. Better technology shows the way to a higher effectiveness of labor--the abilities and education of labor force, the skill of labor force to handle modern machine technologies, and efficiency with which the economy's businesses and marketplaces function.
However, a major part is also played by second factor: capital intensity. The more capital an average worker has at his or her disposal to increase productivity, the more prosperous economy will be. In turn, there are two standard determinants of capital intensity. The first is the investment effort made by economy: the share of total production, real GDP--- saved and invested to increase the capital stock. The second is the economy’s investment requirement: how much new investment is needed to merely equip new workers with the standard level of capital, to continue with new technology, and to replace worn-machines and infrastructures. The ratio between investment effort and the investment requirements of economy decides the economy's capital intensity. Capital intensity is calculated by economy’s capital-output ratio K/Y—the economy’s capital stock K divided by its yearly real GDP Y—which we will write using a lower-case Greek kappa:
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