Solow-Swan growth model - Essay Example

Macro and Micro Economics Real wages are pro-cyclical The neoclassical growth model or the Solow-Swan growth model is a type of economic model that analyzes long run economic growth in the neoclassical economic framework. This model often attempts to explain the effects of the long run economic growth by considering the capital accumulation, productivity, technological progress, and population growth. The model explains the long term and short implication of these factors on economy. For instance, policies on economies like investment subsidies or tax cut that can immensely affect the stead output level, but has no effects on the national curve on the long-term levels. Notably, economic growth can only be affected short-term growths sine the short run often makes the economy converge at a new steady output level. In the economy converges, the steady state is then calculated by the capital accumulation rate (Frank and Bernanke 15). On the other hand, the capital accumulation is calculated by savings rate as well as the capital depreciation rate. Graphical Representation The model begins with neoclassical production function presented by equation Y/L = F (K/L. making y the subject of the equation y = f(k), and this is represented by the red curve. Therefore, output per worker translates to capital per worker. From the graph, n = population growth rate, y = output/income per, k = capital per worker, worker, s = saving rate, L = labor force, and δ = depreciation. The steady state is at point A where the two graphs interact. At this point, the first equilibrium, the output per worker is ever constant. When the investment cannot combat population output per worker the curve falls from y2 to y0. When saving per worker is greater than depreciation plus the population growth, the cumulative capital increases leading to shifting of the steady state from equilibrium A to B. this explains a steady expansion of the economy that eventually drops to steady growth rate. Keynesian economics The concept of Keynesian economics is based on divine entity that can lead to over economic difficulties. The Keynesian economics model emphases on the fact that intervention put by the government to necessary economic stability and growth during economic hard times. In this economic model, the government has a vital role to smoothen the business cycle bumps. The model stresses on the significant measures the government should take on spending, hiking, tax breaking among other measures for the economy to function best during the economic crisis. The main importance of Keynesian economics economy is that it helps governments to survive severe economic depression (Frank and Bernanke 54). According to Keynesian economics theory, the macroeconomic economy is significant than a market aggregate. Moreover, resource markets and individual commodities can easily lead to automatic equilibrium that can last for a long time. However, it does not guarantee fell employment. Nonetheless, the Keynesian economics benefit government policies since it gives a helping hand to the economy. IS/LM chart illustrates an upward shift in the IS a curve that indicates an increase private investment or government spending thereby leading to interest rates (i) due to higher output (Y) Great Recession The Great Recession is the estimated as the longest regression of between 2007 and 2012. Therefore, it is sometimes called the 2007 global regression or the lesser depression. It is related to the dominant global decline that started in December 2007 and registered a sharp down downward turn in 2008. The Great Recession affected the economy of the entire globe and some of the countries were hardly hit. The main characteristic of this recession was the systematic imbalance that led to global financial crisis between 2007 and 2012. Furthermore, it led to the European sovereign debt crisis. Regardless, of the European debt crisis, china and United States showed a continued economic growth; thus, these two nations becoming global economic obstacle. During this period, the United States’ mortgage backed security that had inaccessible risks that were marketed around the world (Frank and Bernanke 171). This led to a broad credit based boom fed real estates and equities in a global speculative bubble. This was initiated to reinforce the lending practices that had proven risky. Production Function The third quarter of the year 2008, the real GDP registered a contraction in value. By the year 2009, $14.5 trillion worth global company values had been erased due to the global financial crisis. The majority had registered a drop in the income levels with the median male workers registering $ 32,137 by the year 2010 compared to $32,844 in the year 1968. However, the employment level did not reach the levels it reached in the 1980s recessions. Efficiency Wage Theory The efficiency wage theory often explains that the structural employment on some wages or markets that are usually set above the equilibrium wage to ensure that labor supply and demand are brought in balance. In the case of serious recession, this phenomenon was attributed for by labor unions and the governments’’ regulations on the minimum wage laws. The attained equilibrium levels aimed at increasing the productivity of workers. The effectiveness of this theory applies that workers are not in all cases, in full knowledge of the nature of work or the work efficiency within the organization (Frank and Bernanke 154). In these cases, firms often spend more money and time to boost their productivity. Proper application of the theory was with the work force despite the greater recession that affects the globe. Technical change and wage inequality was an important feature in the United States’ real wages since 1970. The great recession led to slowdown in growth of real wages and a drastic increase wage inequality. However, the shock to wealth (a loss of $14 trillion) due to the 2007 – 2012 recessions did not lead to significant labor change. There was a technical change that led to wage inequality. The productivity growth slowdown combined with increased labor force has maintained real wages from rising compared to the 1970 recession. Notably, the change in the Skill-biased technical including computerization increased the real wages of highly educated or professional workers. However, there is a reduction in unskilled real wages workers. Works Cited Frank, Robert H, and Ben Bernanke. Principles of Microeconomics. Beijing: Qing hua da xuechu ban she, 2003. Print. Read More