Lecture 6 - Economic Growth – 1(B). The main contents of the chapter consist of the following: An increase in the saving rate leads to higher output in the long run, faster growth temporarily, but not faster steady state growth. | Review of the previous lecture The Solow growth model shows that, in the long run, a country’s standard of living depends positively on its saving rate. negatively on its population growth rate. Lecture 7 Economic Growth – 1(B) Instructor: Prof. Abbas Lecture Contents Steady state Golden Rule The equation of motion for k The Solow model’s central equation Determines behavior of capital over time which, in turn, determines behavior of all of the other endogenous variables because they all depend on k. ., income per person: y = f(k) consump. per person: c = (1–s) f(k) k = s f(k) – k The steady state If investment is just enough to cover depreciation [sf(k) = k ], then capital per worker will remain constant: k = 0. This constant value, denoted k*, is called the steady state capital stock. k = s f(k) – k The steady state Investment and depreciation Capital per worker, k sf(k) k k* Moving toward the steady state Investment and depreciation . | Review of the previous lecture The Solow growth model shows that, in the long run, a country’s standard of living depends positively on its saving rate. negatively on its population growth rate. Lecture 7 Economic Growth – 1(B) Instructor: Prof. Abbas Lecture Contents Steady state Golden Rule The equation of motion for k The Solow model’s central equation Determines behavior of capital over time which, in turn, determines behavior of all of the other endogenous variables because they all depend on k. ., income per person: y = f(k) consump. per person: c = (1–s) f(k) k = s f(k) – k The steady state If investment is just enough to cover depreciation [sf(k) = k ], then capital per worker will remain constant: k = 0. This constant value, denoted k*, is called the steady state capital stock. k = s f(k) – k The steady state Investment and depreciation Capital per worker, k sf(k) k k* Moving toward the steady state Investment and depreciation Capital per worker, k sf(k) k k* k = sf(k) k depreciation k k1 investment Moving toward the steady state Investment and depreciation Capital per worker, k sf(k) k k* k1 k = sf(k) k k k2 Moving toward the steady state Investment and depreciation Capital per worker, k sf(k) k k* k = sf(k) k k2 investment depreciation k Moving toward the steady state Investment and depreciation Capital per worker, k sf(k) k k* k = sf(k) k k2 k k3 Moving toward the steady state Investment and depreciation Capital per worker, k sf(k) k k* k = sf(k) k k3 Summary: As long as k A numerical example Production function (aggregate): To derive the per-worker production function, divide through by L: Then substitute y = Y/L and k = K/L to get A numerical example, cont. Assume: s = = initial value of k = As each assumption appears on the screen, explain it’s .
