Question

Growth in US real GDP per capita has been slowing over the last six decades. What policies could the US government enact that would increase US economic growth?

List 3.

Explain using the Solow Model if possible as well.

Answer 1

Some measurements tha us can implement to improve his economic growth:The government can boost demand by cutting tax and increasing government spending. Lower income tax will increase disposable income and encourage consumer spending. Higher government spending will create jobs and provide an economic stimulus.The problem with expansionary fiscal policy is that it leads to an increase in government borrowing. To finance this extra spending, the government have to borrow from the private sector. If the economy is already growing, then higher government borrowing can crowd out the private sector. Expansionary fiscal policy is also criticised by those who fear it is an excuse to permanently increase the size of the government sector.

For countries stuck in a fixed exchange rate. Devaluation can help restore competitiveness and boost domestic demand. A fall in the exchange rate makes exports cheaper and imports more expensive.For example, Argentina and Iceland both had rapid devaluations, which in the medium term helped their economic recovery. The UK also benefited from leaving the exchange rate mechanism in 1992.The alternative strategy for improving economic growth is to use supply-side policies. These attempt to increase productivity and efficiency of the economy.Just like monetary policy, fiscal policy can be used to influence both expansion and contraction of GDP as a measure of economic growth. When the government is exercising its powers by lowering taxes and increasing their expenditures, they are practicing expansionary fiscal policy.It is argued lower income tax can boost the incentive to work and increase labour supply. It is possible, if income taxes were excessive, then cutting them may encourage people to work more. However, this argument is often exaggerated. Reducing the basic rate of income tax from 23% to 22% would have a very minimal impact on labour supply. With a tax cut, there is both an income and substitution effect. The income effect states that higher taxes make people work longer hours to achieve their target income. (economics of tax cuts).Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money.

If the population stays the same, an increase in GDP grows income per capita. There are several ways to increase GDP: Education and training. Greater education and job skills allow individuals to produce more goods and services, start businesses and earn higher incomes.

2- solow growth model-The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress.The Solow Growth Model assumes that the production function exhibits constant-returns-to-scale (CRS). Under such an assumption, if we double the level of capital stock and double the level of labor.According to the Solow growth model, in contrast, higher saving and investment has no effect on the rate of growth in the long run. Solow sets up a mathematical model of long-run economic growth. He assumes full employment of capital and labor. The Solow model is consistent with the stylized facts of economic growth.The steady-state is the key to understanding the Solow Model. At the steady-state, an investment is equal to depreciation. That means that all of investment is being used just to repair and replace the existing capital stock. No new capital is being created. So, if the capital stock isn't growing, nothing is growing.Exogenous growth theory states that economic growth arises due to influences outside the economy. Endogenous (internal) growth factors would be capital investment, policy decisions, and an expanding workforce population. These factors are modeled by the Solow model, the Ramsey model, and the Harrod-Domar model.He has shown that if technical coefficients of production are assumed to be variable, the capital labour ratio may adjust itself to equilibrium ratio in course of time.